III Constitutional Limitations Cases

7/31/2019 III Constitutional Limitations Cases

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MANILA GAS CORPORATION, plaintiff-appellant,vs.THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.

DeWitt, Perkins and Ponce Enrile for appellant.Office of the Solicitor-General Hilado for appellee.

MALCOLM, J.:

This is an action brought by the Manila Gas Corporation against the Collector ofInternal Revenue for the recovery of P56,757.37, which the plaintiff was required bythe defendant to deduct and withhold from the various sums paid it to foreigncorporations as dividends and interest on bonds and other indebtedness and which theplaintiff paid under protest. On the trial court dismissing the complaint, with costs, theplaintiff appealed assigning as the principal errors alleged to have been committed thefollowing:

1. The trial court erred in holding that the dividends paid by the plaintiffcorporation were subject to income tax in the hands of its stockholders, becauseto impose the tax thereon would be to impose a tax on the plaintiff, in violation ofthe terms of its franchise, and would, moreover, be oppressive and inequitable.

2. The trial court erred in not holding that the interest on bonds and otherindebtedness of the plaintiff corporation, paid by it outside of the PhilippineIslands to corporations not residing therein, were not, on the part of the recipientsthereof, income from Philippine sources, and hence not subject to Philippine

income tax.

The facts, as stated by the appellant and as accepted by the appellee, may besummarized as follows: The plaintiff is a corporation organized under the laws of thePhilippine Islands. It operates a gas plant in the City of Manila and furnishes gasservice to the people of the metropolis and surrounding municipalities by virtue of afranchise granted to it by the Philippine Government. Associated with the plaintiff arethe Islands Gas and Electric Company domiciled in New York, United States, and theGeneral Finance Company domiciled in Zurich, Switzerland. Neither of these lastmentioned corporations is resident in the Philippines.

For the years 1930, 1931, and 1932, dividends in the sum of P1,348,847.50 were paidby the plaintiff to the Islands Gas and Electric Company in the capacity of stockholdersupon which withholding income taxes were paid to the defendant totalling P40,460.03For the same years interest on bonds in the sum of P411,600 was paid by the plaintiffto the Islands Gas and Electric Company upon which withholding income taxes werepaid to the defendant totalling P12,348. Finally for the stated time period, interest onother indebtedness in the sum of P131,644,90 was paid by the plaintiff to the Islands



Gas and Electric Company and the General Finance Company respectively uponwhich withholding income taxes were paid to the defendant totalling P3,949.34.

Some uncertainty existing regarding the place of payment, we will not go into thisfactor of the case at this point, except to remark that the bonds and other tokens ofindebtedness are not to be found in the record. However, Exhibits E, F, and G, certifiedcorrect by the Treasurer of the Manila Gas Corporation, purport to prove that the place

of payment was the United States and Switzerland.

The appeal naturally divides into two subjects, one covered by the first assigned error,and the other by the second assigned error. We shall discuss these subjects anderrors in order.

1. Appellant first contends that the dividends paid by it to its stockholders, theIslands Gas and Electric Company , were not subject to tax because to impose atax thereon would be to do so on the plaintiff corporation, in violation of the termsof its franchise and would, moreover, be oppressive and inequitable. Thisargument is predicated on the constitutional provision that no law impairing theobligation of contracts shall be enacted. The particular portion of the franchisewhich is invoked provides:

The grantee shall annually on the fifth day of January of each year pay tothe City of Manila and the municipalities in the Province of Rizal in whichgas is sold, two and one half per centum of the gross receipts within saidcity and municipalities, respectively, during the preceding year. Saidpayment shall be in lieu of all taxes, Insular, provincial and municipal,

except taxes on the real estate, buildings, plant, machinery, and otherpersonal property belonging to the grantee.

The trial judge was of the opinion that the instant case was governed by ourprevious decision in the case ofPhilippine Telephone and Telegraph Co., vs.Collector of Internal Revenue ([1933], 58 Phil. 639). In this view we concur. It istrue that the tax exemption provision relating to the Manila Gas Corporationhereinbefore quoted differs in phraseology from the tax exemption provision to befound in the franchise of the Telephone and Telegraph Company, but the ratio decidendi of the two cases is substantially the same. As there held and as now

confirmed, a corporation has a personality distinct from that of its stockholders,enabling the taxing power to reach the latter when they receive dividends fromthe corporation. It must be considered as settled in this jurisdiction that dividendsof a domestic corporation, which are paid and delivered in cash to foreigncorporations as stockholders, are subject to the payment in the income tax, theexemption clause in the charter of the corporation notwithstanding.

For the foreign reasons, we are led to sustain the decision of the trial court and tooverrule appellant's first assigned error.



2. In support of its second assignment of error, appellant contends that, as theIslands Gas and Electric Company and the General Finance Company aredomiciled in the United States and Switzerland respectively, and as the intereston the bonds and other indebtedness earned by said corporations has been paidin their respective domiciles, this is not income from Philippine sources within themeaning of the Philippine Income Tax Law. Citing sections 10 (a) and 13 (e) ofAct No. 2833, the Income Tax Law, appellant asserts that their applicability has

been squarely determined by decisions of this court in the cases ofManila Railroad Co. vs. Collector of Internal Revenue (No. 31196, promulgatedDecember 2, 1929, nor reported), and Philippine Railway Co. vs. Posadas (No.38766, promulgated October 30, 1933 [58 Phil., 968]) wherein it was held thatinterest paid to non-resident individuals or corporations is not income fromPhilippine sources, and hence not subject to the Philippine Income Tax. TheSolicitor-General answers with the observation that the cited decisionsinterpreted the Income Tax Law before it was amended by Act No. 3761 to coverthe interest on bonds and other obligations or securities paid "within or without

the Philippine Islands." Appellant rebuts this argument by "assuming, for the sakeof the argument, that by the amendment introduced to section 13 of Act No. 2833by Act No. 3761 the Legislature intended the interest from Philippine sources andso is subject to tax," but with the necessary sequel that the amendatory statute isinvalid and unconstitutional as being the power of the Legislature to enact.

Taking first under observation that last point, it is to be observed that neither in thepleadings, the decision of the trial court, nor the assignment of errors, was the questionof the validity of Act No. 3761 raised. Under such circumstances, and no jurisdictionalissue being involved, we do not feel that it is the duty of the court to pass on the

constitutional question, and accordingly will refrain from doing so. (Cadwaller-GibsonLumber Co. vs. Del Rosario [1913], 26 Phil., 192; Macondray and Co. vs. Benito andOcampo, P. 137, ante ; State vs. Burke [1912], 175 Ala., 561.)

As to the applicability of the local cases cited and of the Porto Rican case ofDomenech vs. United Porto Rican Sugar co. ([1932], 62 F. [2d], 552), we need onlyobserve that these cases announced good law, but that each he must be decided onits particular facts. In other words, in the opinion of the majority of the court, the facts atbar and the facts in those cases can be clearly differentiated. Also, in the case at bar

there is some uncertainty concerning the place of payment, which under one viewcould be considered the Philippines and under another view the United States andSwitzerland, but which cannot be definitely determined without the necessarydocumentary evidence before, us.

The approved doctrine is that no state may tax anything not within its jurisdictionwithout violating the due process clause of the constitution. The taxing power of a statedoes not extend beyond its territorial limits, but within such it may tax persons,property, income, or business. If an interest in property is taxed, the situs of either theproperty or interest must be found within the state. If an income is taxed, the recipient



thereof must have a domicile within the state or the property or business out of whichthe income issues must be situated within the state so that the income may be said tohave a situs therein. Personal property may be separated from its owner, and he maybe taxed on its account at the place where the property is although it is not the place ofhis own domicile and even though he is not a citizen or resident of the state whichimposes the tax. But debts owing by corporations are obligations of the debtors, andonly possess value in the hands of the creditors. (Farmers Loan Co. vs. Minnesota

[1930], 280 U.S., 204; Union Refrigerator Transit Co. vs. Kentucky [1905], 199 U.S.,194 State Tax on Foreign held Bonds [1873, 15 Wall., 300; Bick vs. Beach [1907], 206U. S., 392; State ex rel. Manitowoc Gas Co. vs. Wig. Tax Comm. [1915], 161 Wis.,111; United States Revenue Act of 1932, sec. 143.)

These views concerning situs for taxation purposes apply as well to an organized,unincorporated territory or to a Commonwealth having the status of the Philippines.

Pushing to one side that portion of Act No. 3761 which permits taxation of interest onbonds and other indebtedness paid without the Philippine Islands, the question is if theincome was derived from sources within the Philippine Islands.

In the judgment of the majority of the court, the question should be answered in theaffirmative. The Manila Gas Corporation operates its business entirely within thePhilippines. Its earnings, therefore come from local sources. The place of materialdelivery of the interest to the foreign corporations paid out of the revenue of thedomestic corporation is of no particular moment. The place of payment even ifconceded to be outside of tho country cannot alter the fact that the income was derivedfrom the Philippines. The word "source" conveys only one idea, that of origin, and the

origin of the income was the Philippines.

In synthesis, therefore, we hold that conditions have not been provided which justifythe court in passing on the constitutional question suggested; that the facts whilesomewhat obscure differ from the facts to be found in the cases relied upon, and thatthe Collector of Internal Revenue was justified in withholding income taxes on intereston bonds and other indebtedness paid to non-resident corporations because thisincome was received from sources within the Philippine Islands as authorized by theIncome Tax Law. For the foregoing reasons, the second assigned error will beoverruled.

Before concluding, it is but fair to state that the writer's opinion on the first subject andthe first assigned error herein discussed is accurately set forth, but that his opinion onthe second subject and the second assigned error is not accurately reflected, becauseon this last division his views coincide with those of the appellant. However, in theinterest of the prompt disposition of this case, the decision has been written up inaccordance with instructions received from the court.

Judgment affirmed, with the cost of this instance assessed against the appellant.



Hull, Vickers, Imperial, Butte, and Recto, JJ., concur.

Separate Opinions

VILLA-REAL, J., concurring and dissenting:

I concur with the majority decision regarding the disposition of the second error, butdissent as to its disposition of the first error. In my opinion, the exemption clause to befound in the charter of the plaintiff is broader in scope than that to be found in thecharter of the Philippine Telephone and Telegraph Company, thus making inapplicablethe decision of this court in the case of Philippine Telephone and Telegraph Co. vs.Collector of Internal Revenue (58 Phil., 639).

ABAD SANTOS, J., concurring in part and dissenting in part:

I am of opinion that the first assignment of error should be sustained and the judgmentbelow reversed in that respect.

The franchise held by the appellant corporation contains a stipulation by theGovernment to the effect that the payment by the corporation to the entities named inthe franchise of two and one-half per centum of its gross receipts, shall be in lieu of alltaxes, except taxes on the real estate, buildings, plant, machinery and other personalproperty belonging to the corporation. The dividends paid by the appellant corporationto its stockholders were a part of its earnings and as such not subject to tax under theterms of the franchise. The franchise in this case is a contract, the obligation of whichcan not be impaired.

I agree with the majority of the court that the second assignment of error should beoverruled, and the judgment affirmed in that particular.

Section 13 (e) of Act No. 2833, as amended by Act No. 3761, expressly provides forthe imposition of a tax "... upon the income derived from interest upon bonds andmortgages, or deeds of trust, notes, or other interest-bearing obligations of a domestic

or resident foreign corporation, ..." The income derived from the interest on bonds andother indebtedness of the appellant corporation, is clearly within the purview of thestatute. The power of the legislature to impose such a tax must be recognized. Asstated by Justice Bradley in United States vs. Erie R. Co. (106 U.S., 327; 27 Law. ed.,151, 153) : "... The tax laid upon their bonds was intended to affect the owners of thebonds, and whilst the companies were directed to pay it, they were authorized to retainthe amount from the installments due to the bondholders, whether citizens or aliens.The objection that Congress had no power to tax non-resident aliens, is met by the factthat the tax was not assessed against them personally, but against the rem , the credit,



the debt due to them. Congress has the right to tax all property within the jurisdiction ofthe United States, with certain exceptions not necessary to be noted. The money dueto non-resident bondholders in this case was in the United States in the hands of thecompany before it could be transmitted to London, or other place where thebondholders resided. Whilst here it was liable to taxation. Congress, by the internalrevenue law, by way of tax., stopped a part of the money before its transmission,namely; 5 per cent of it. Plausible grounds for levying such a tax might be assigned. It

might be said that the creditor is protected by our laws in the enjoyment of the debt;that the whole machinery of our courts and the physical power of the government areplaced at his disposal for its security and collection."

AVANCEÑA, C.J., dissenting:

I do not agree with the majority opinion with respect to the appellant's secondassignment of error, which in my opinion should be sustained. The question involved inthis error has been clearly decided by this court in the case of Manila Railroad Co. vs.Collector of Internal Revenue (G.R. No. 31196, promulgated December 2, 1929, notreported). In said case it was held that interest on bonds purchased outside thePhilippine Islands by non-residents of the Islands cannot be considered derived fromsources within the Islands. The amendment of the law introduced by Act no. 3761 as tothe place of payment of interest does not affect the aspect of the question raised in thiserror if the interest on which the tax in the present case has been collected is notderived from sources within the Islands, as it is not so in fact, in accordance with thedoctrine laid down in said case of Manila Railroad Co. vs. Collector of Internal Revenue.

GODDARD, J., dissenting:

The tax exemption and commutation clause in the plaintiffs franchise provides that:

The grantee shall annually on the 5th day of January of each year pay to the City ofManila and to the municipalities in the Province of Rizal in which gas is sold, two andone half per centum of the gross receipts within said city and municipalities,respectively, during the preceding year. Said payment shall be in lieu of all tax, Insular,provincial and municipal, except taxes on the real estate, buildings, plant, machinery,and other personal property belonging to the grantee.

This franchise is a contract between the Government and the grantees thereof, whoserights have been acquired by the plaintiff corporation. In Manila Railroad Co. vs.Rafferty (40 Phil., 224, 230), this court held that "... Once granted, a charter becomes aprivate contract ...." Article 1091 of the Civil Code provides that "Obligations arisingfrom contract shall have the force of law between the contracting parties and must beperformed in accordance with their stipulations." It follows that as the plaintiffcorporation has paid to the City of Manila and to the municipalities of Rizal, where gas



is sold by it, the franchise tax stipulated in the contract, the Government has no legalright to impose another tax on its earnings.

The case of Farrington vs. Tennessee (95 U.S., 679; 24 Law. ed., 558), is almost inexact parallel with the case at bar. The facts of that case were as follows: The Unionand Planters' Bank of Memphis was duly organized under the charter granted by theLegislature of Tennessee, by two Acts, respectively dated March 20, 1858, and

February 12, 1869. Since its organization it continued doing a regular bankingbusiness. Its capital subscribed and paid in amounted to $675,000, divided into 6,750shares of $100 each. Farrington, the plaintiff in error, was the owner of 150 shares, ofthe value of $15,000.

The tenth section of the charter of the bank declared:

That said Company shall pay to the State an annual tax of one-half of one percent on each share of the capital stock subscribe, which shall be in lieu of allother taxes.

The State of Tennessee and the County of Shelby, claiming the right under theRevenue Law of the State, to tax the stock of the plaintiff in error, a stockholder of thebank, assessed and taxed it for the year 1872. It was assessed at its per value. Thetax imposed by the State was forty cents on the $100, making the state tax $60. Thecounty tax was $1.20 on the $100, making the county tax $180.

The plaintiff in error denied the right of the State and County to impose these taxes. Heclaimed;

(1) That the 10th section of the charter was a contract between the State and thebank;

(2) That any other tax than that therein specified was expressly forbidden, and.

(3) That the revenue laws imposing the taxes in question impaired the obligationof the contract.

The Supreme Court of Tennessee adjudge the taxes to be valid and the plaintiff in

error thereupon removed the case to the Federal Supreme Court for review.

In upholding all of the contentions of the plaintiff in error, and pronouncing invalid thetaxes involved as impairing the obligation of the contract created by the franchise, theUnited States Supreme court said:

This case turns upon the construction to be given to the 10th section of thecharter of the bank. . . .

x x x x x x x x x



on the ground that the court did not consider the other portions of the charter which,according to the State, were material. The Supreme Court — this time unanimously — declined to reverse its view as expressed in the Farrington decision, saying.

We do not think under the circumstances that we ought now to come to adifferent conclusion upon the question of exemption from that which was arrivedat by this court in the Farrington Case . As the whole charter was then before the

court, we are not prepared to say that its force was misunderstood, or that therewas an omission by the court to consider all the language of the exemptionclause simply because a portion of its omitted in the quotation from the recordmade in the opinion therein delivered. We are not inclined, therefore, to overruleor distinguish the Farrington Case , and we must now told that the charter clauseof exemption limits the amount of tax on each share of stock in the hands of theshareholder, and that any subsequent revenue law of the state which imposes anadditional tax on such shares in the hands or shareholders, impairs the obligationof the contract, and is void. This compels us to reverse the judgments herein

against the shareholders. (Bank of Commerce vs. Tennessee, 16 U.S. 134; 40Law. ed., 645, 648.)

The doctrine of the Farrington Case is now the settled rule of the highest court of theUnited States. The first assignment of error should therefore be sustained.

As to the second assignment of error I concur with the dissenting opinion of the ChiefJustice for the reasons set forth therein. Consequently that assignment of error shouldalso be sustained.

The trial court erred in not holding that interest received by a non-resident corporation,outside the Philippine Islands, is not income from Philippine sources and so not subjectto income tax.

In view of the above I am of the opinion that the appealed decision should be reversedand another entered by this courts ordering the defendant to pay the plaintiff the sumof P40,460.03, the amount of withholding taxes paid on account of interest on bondsand other indebtedness, or a total of P56,757.37.

ANTERO M. SISON, JR., petitioner,

vs.RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue;ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMASTOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA,Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit,and CESAR E. A. VIRATA, Minister of Finance, respondents.

Antero Sison for petitioner and for his own behalf.



The Solicitor General for respondents.

FERNANDO, C.J.:

The success of the challenge posed in this suit for declaratory relief or prohibition

proceeding 1 on the validity of Section I of Batas Pambansa Blg. 135 depends upon ashowing of its constitutional infirmity. The assailed provision further amends Section 21of the National Internal Revenue Code of 1977, which provides for rates of tax oncitizens or residents on (a) taxable compensation income, (b) taxable net income, (c)royalties, prizes, and other winnings, (d) interest from bank deposits and yield or anyother monetary benefit from deposit substitutes and from trust fund and similararrangements, (e) dividends and share of individual partner in the net profits of taxablepartnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtuethereof, "he would be unduly discriminated against by the imposition of higher rates oftax upon his income arising from the exercise of his profession vis-a-vis those whichare imposed upon fixed income or salaried individual taxpayers. 4 He characterizes theabove sction as arbitrary amounting to class legislation, oppressive and capricious incharacter 5For petitioner, therefore, there is a transgression of both the equalprotection and due process clauses 6 of the Constitution as well as of the rule requiringuniformity in taxation. 7

The Court, in a resolution of January 26, 1982, required respondents to file an answerwithin 10 days from notice. Such an answer, after two extensions were granted theOffice of the Solicitor General, was filed on May 28, 1982.8 The facts as alleged were

admitted but not the allegations which to their mind are "mere arguments, opinions orconclusions on the part of the petitioner, the truth [for them] being those stated [in their]Special and Affirmative Defenses." 9 The answer then affirmed: "Batas Pambansa Big.135 is a valid exercise of the State's power to tax. The authorities and cases citedwhile correctly quoted or paraghraph do not support petitioner's stand." 10 The prayeris for the dismissal of the petition for lack of merit.

This Court finds such a plea more than justified. The petition must be dismissed.

1. It is manifest that the field of state activity has assumed a much wider scope, The

reason was so clearly set forth by retired Chief Justice Makalintal thus: "The areaswhich used to be left to private enterprise and initiative and which the government wascalled upon to enter optionally, and only 'because it was better equipped to administerfor the public welfare than is any private individual or group of individuals,' continue tolose their well-defined boundaries and to be absorbed within activities that thegovernment must undertake in its sovereign capacity if it is to meet the increasingsocial challenges of the times." 11 Hence the need for more revenues. The power totax, an inherent prerogative, has to be availed of to assure the performance of vitalstate functions. It is the source of the bulk of public funds. To praphrase a recent



decision, taxes being the lifeblood of the government, their prompt and certainavailability is of the essence. 12

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute ofsovereignty. It is the strongest of all the powers of of government." 13 It is, of course, tobe admitted that for all its plenitude 'the power to tax is not unconfined. There arerestrictions. The Constitution sets forth such limits . Adversely affecting as it does

properly rights, both the due process and equal protection clauses inay properly beinvoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if itwere otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that"the power to tax involves the power to destroy." 14 In a separate opinion in Graves v.New York , 15 Justice Frankfurter, after referring to it as an 1, unfortunate remarkcharacterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of thetimes following] a free use of absolutes." 16 This is merely to emphasize that it is riotand there cannot be such a constitutional mandate. Justice Frankfurter could rightfullyconclude: "The web of unreality spun from Marshall's famous dictum was brushed

away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power todestroy while this Court sits." 17 So it is in the Philippines.

3. This Court then is left with no choice. The Constitution as the fundamental lawoverrides any legislative or executive, act that runs counter to it. In any case thereforewhere it can be demonstrated that the challenged statutory provision — as petitionerhere alleges — fails to abide by its command, then this Court must so declare andadjudge it null. The injury thus is centered on the question of whether the imposition ofa higher tax rate on taxable net income derived from business or profession than oncompensation is constitutionally infirm.

4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. Amere allegation, as here. does not suffice. There must be a factual foundation of suchunconstitutional taint. Considering that petitioner here would condemn such a provisionas void or its face, he has not made out a case. This is merely to adhere to theauthoritative doctrine that were the due process and equal protection clauses areinvoked, considering that they arc not fixed rules but rather broad standards, there is aneed for of such persuasive character as would lead to such a conclusion. Absent sucha showing, the presumption of validity must prevail. 18

5. It is undoubted that the due process clause may be invoked where a taxing statute isso arbitrary that it finds no support in the Constitution. An obvious example is where itcan be shown to amount to the confiscation of property. That would be a clear abuse ofpower. It then becomes the duty of this Court to say that such an arbitrary actamounted to the exercise of an authority not conferred. That properly calls for theapplication of the Holmes dictum. It has also been held that where the assailed taxmeasure is beyond the jurisdiction of the state, or is not for a public purpose, or, incase of a retroactive statute is so harsh and unreasonable, it is subject to attack ondue process grounds. 19



6. Now for equal protection. The applicable standard to avoid the charge that there is adenial of this constitutional mandate whether the assailed act is in the exercise of thelice power or the power of eminent domain is to demonstrated that the governmentalact assailed, far from being inspired by the attainment of the common weal wasprompted by the spirit of hostility, or at the very least, discrimination that finds nosupport in reason. It suffices then that the laws operate equally and uniformly on allpersons under similar circumstances or that all persons must be treated in the same

manner, the conditions not being different, both in the privileges conferred and theliabilities imposed. Favoritism and undue preference cannot be allowed. For theprinciple is that equal protection and security shall be given to every person undercircumtances which if not Identical are analogous. If law be looked upon in terms ofburden or charges, those that fall within a class should be treated in the same fashion,whatever restrictions cast on some in the group equally binding on the rest." 20 Thatsame formulation applies as well to taxation measures. The equal protection clause is,of course, inspired by the noble concept of approximating the Ideal of the laws benefitsbeing available to all and the affairs of men being governed by that serene and

impartial uniformity, which is of the very essence of the Idea of law. There is, however,wisdom, as well as realism in these words of Justice Frankfurter: "The equality at whichthe 'equal protection' clause aims is not a disembodied equality. The FourteenthAmendment enjoins 'the equal protection of the laws,' and laws are not abstractpropositions. They do not relate to abstract units A, B and C, but are expressions ofpolicy arising out of specific difficulties, address to the attainment of specific ends bythe use of specific remedies. The Constitution does not require things which aredifferent in fact or opinion to be treated in law as though they were the same." 21Hencethe constant reiteration of the view that classification if rational in character isallowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court,

through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in thepower to tax that a state be free to select the subjects of taxation, and it has beenrepeatedly held that 'inequalities which result from a singling out of one particular classfor taxation, or exemption infringe no constitutional limitation.'" 23

7. Petitioner likewise invoked the kindred concept of uniformity. According to theConstitution: "The rule of taxation shag be uniform and equitable." 24 This requirementis met according to Justice Laurel in Philippine Trust Company v. Yatco, 25 decided in1940, when the tax "operates with the same force and effect in every place where the

subject may be found. "

26

He likewise added: "The rule of uniformity does not call forperfect uniformity or perfect equality, because this is hardly attainable." 27 The problemof classification did not present itself in that case. It did not arise until nine years later,when the Supreme Court held: "Equality and uniformity in taxation means that alltaxable articles or kinds of property of the same class shall be taxed at the same rate.The taxing power has the authority to make reasonable and natural classifications forpurposes of taxation, ... . 28 As clarified by Justice Tuason, where "the differentiation"complained of "conforms to the practical dictates of justice and equity" it "is notdiscriminatory within the meaning of this clause and is therefore uniform." 29 There is



quite a similarity then to the standard of equal protection for all that is required is thatthe tax "applies equally to all persons, firms and corporations placed in similarsituation." 30

8. Further on this point. Apparently, what misled petitioner is his failure to take intoconsideration the distinction between a tax rate and a tax base. There is no legalobjection to a broader tax base or taxable income by eliminating all deductible items

and at the same time reducing the applicable tax rate. Taxpayers may be classifiedinto different categories. To repeat, it. is enough that the classification must rest uponsubstantial distinctions that make real differences. In the case of the gross incometaxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classificationis the susceptibility of the income to the application of generalized rules removing alldeductible items for all taxpayers within the class and fixing a set of reduced tax ratesto be applied to all of them. Taxpayers who are recipients of compensation income areset apart as a class. As there is practically no overhead expense, these taxpayers aree not entitled to make deductions for income tax purposes because they are in the

same situation more or less. On the other hand, in the case of professionals in thepractice of their calling and businessmen, there is no uniformity in the costs orexpenses necessary to produce their income. It would not be just then to disregard thedisparities by giving all of them zero deduction and indiscriminately impose on all alikethe same tax rates on the basis of gross income. There is ample justification then forthe Batasang Pambansa to adopt the gross system of income taxation tocompensation income, while continuing the system of net income taxation as regardsprofessional and business income.

9. Nothing can be clearer, therefore, than that the petition is without merit, considering

the (1) lack of factual foundation to show the arbitrary character of the assailedprovision; 31 (2) the force of controlling doctrines on due process, equal protection, anduniformity in taxation and (3) the reasonableness of the distinction betweencompensation and taxable net income of professionals and businessman certainly nota suspect classification,

WHEREFORE, the petition is dismissed. Costs against petitioner.

Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr.,De la Fuente and Cuevas, JJ., concur.

Teehankee, J., concurs in the result.

Plana, J., took no part.



Separate Opinions

AQUINO, J., concurring:

I concur in the result. The petitioner has no cause of action for prohibition.

ABAD SANTOS, J., dissenting:

This is a frivolous suit. While the tax rates for compensation income are lower thanthose for net income such circumtance does not necessarily result in lowertax payments for these receiving compensation income. In fact, the reverse will mostlikely be the case; those who file returns on the basis of net income will pay less taxesbecause they claim all sort of deduction justified or not I vote for dismissal.

Separate Opinions




This is a frivolous suit. While the tax rates for compensation income are lower thanthose for net income such circumtance does not necessarily result in lowertax payments for these receiving compensation income. In fact, the reverse will mostlikely be the case; those who file returns on the basis of net income will pay less taxesbecause they claim all sort of deduction justified or not I vote for dismissal.

G.R. No. 127410 January 20, 1999

CONRADO L. TIU, JUAN T. MONTELIBANO JR. and ISAGANI M.

JUNGCO, petitioners,vs.

COURT OF APPEALS, HON. TEOFISTO T. GUINGONA JR., BASES CONVERSIONAND DEVELOPMENT AUTHORITY, SUBIC BAY METROPOLITAN AUTHORITY,BUREAU OF INTERNAL REVENUE, CITY TREASURER OF OLONGAPO andMUNICIPAL TREASURER OF SUBIC, ZAMBALES, respondents.



PANGANIBAN, J.:

The constituttional rights to equal protection of the law is not violated by an executiveorder, issued pursuant to law, granting tax and duty incentives only to the bussinessand residents within the "secured area" of the Subic Special Econimic Zone anddenying them to those who live within the Zone but outside such "fenced-in" territory.The Constitution does not require absolute equality among residents. It is enough that

all persons under like circumstances or conditions are given the same privileges andrequired to follow the same obligations. In short, a classification based on valid andreasonable standards does not violate the equal protection clause.

The Case

Before us is a petition for review under Rule 45 of the Rules of Court, seeking thereversal of the Court of Appeals' Decision 1 promulgated on August 29, 1996, andResolution 2 dated November 13, 1996, in CA-GR SP No. 37788.3 The challengedDecision upheld the constitutionality and validity of Executive Order No. 97-A (EO 97-A), according to which the grant and enjoyment of the tax and duty incentivesauthorized under Republic Act No. 7227 (RA 7227) were limited to the businessenterprises and residents within the fenced-in area of the Subic Special EconomicZone (SSEZ).

The assailed Resolution denied the petitioners' motion for reconsideration.

On March 13, 1992, Congress, with the approval of the President, passed into law RA7227 entitled "An Act Accelerating the Conversion of Military Reservations Into Other

Productive Uses, Creating the Bases Conversion and Development Authority for thisPurpose, Providing Funds Therefor and for Other Purposes." Section 12 thereofcreated the Subic Special Economic Zone and granted there to special privileges, asfollows:

Sec. 12. Subic Special Economic Zone. — Subject to the concurrence byresolution of thesangguniang panlungsod of the City of Olongapo andthe sangguniang bayan of the Municipalities of Subic, Morong andHermosa, there is hereby created a Special Economic and Free-port Zoneconsisting of the City of Olongapo and the Municipality of Subic, Province

of Zambales, the lands occupied by the Subic Naval Base and itscontiguous extensions as embraced, covered, and defined by the 1947Military Bases Agreement between the Philippines and the United States ofAmerica as amended, and within the territorial jurisdiction of theMunicipalities of Morong and Hermosa, Province of Bataan, hereinafterreferred to as the Subic Special Economic Zone whose metes and boundsshall be delineated in a proclamation to be issued by the President of thePhilippines. Within thirty (30) days after the approval of this Act, each localgovernment unit shall submit its resolution of concurrence to join the Subic



Special Economic Zone to the Office of the President. Thereafter, thePresident of the Philippines shall issue a proclamation defining the metesand bounds of the zone as provided herein.

The abovementioned zone shall be subject to the following policies:

(a) Within the framework and subject to the mandate and limitations of the

Constitution and the pertinent provisions of the Local Government Code,the Subic Special Economic Zone shall be developed into a self-sustaining,industrial, commercial, financial and investment center to generateemployment opportunities in and around the zone and to attract andpromote productive foreign investments;

(b) The Subic Special Economic Zone shall be operated and managed as aseparate customs territory ensuring free flow or movement of goods andcapital within, into and exported out of the Subic Special Economic Zone,as well as provide incentives such as tax and duty-free importations of rawmaterials, capital and equipment. However, exportation or removal ofgoods from the territory of the Subic Special Economic Zone to the otherparts of the Philippine territory shall be subject to customs duties and taxesunder the Customs and Tariff Code and other relevant tax laws of thePhilippines;

(c) The provision of existing laws, rules and regulations to the contrarynotwithstanding, no taxes, local and national, shall be imposed within theSubic Special Economic Zone. In lieu of paying taxes, three percent (3%)

of the gross income earned by all businesses and enterprises within theSubic Special Economic Zone shall be remitted to the NationalGovernment, one percent (1%) each to the local government units affectedby the declaration of the zone in proportion to their population area, andother factors. In addition, there is hereby established a development fund ofone percent (1%) of the gross income earned by all businesses andenterprises within the Subic Special Economic Zone to be utilized for thedevelopment of municipalities outside the City of Olongapo and theMunicipality of Subic, and other municipalities contiguous to the baseareas.

In case of conflict between national and local laws with respect to taxexemption privileges in the Subic Special Economic Zone, the same shallbe resolved in favor of the latter;

(d) No exchange control policy shall be applied and free markets for foreignexchange, gold, securities and future shall be allowed and maintained inthe Subic Special Economic Zone;



(e) The Central Bank, through the Monetary Board, shall supervise andregulate the operations of banks and other financial institutions within theSubic Special Economic Zone;

(f) Banking and finance shall be liberalized with the establishment of foreigncurrency depository units of local commercial banks and offshore bankingunits of foreign banks with minimum Central Bank regulation;

(g) Any investor within the Subic Special Economic Zone whose continuinginvestment shall not be less than two hundred fifty thousand dollars($250,000), his/her spouse and dependent children under twenty-one (21)years of age, shall be granted permanent resident status within the SubicSpecial Economic Zone. They shall have the freedom of ingress andegress to and from the Subic Special Economic Zone without any need ofspecial authorization form the Bureau of Immigration and Deportation. TheSubic Bay Metropolitan Authority referred to in Section 13 of this Act mayalso issue working visas renewable every two (2) years to foreignexecutives and other aliens possessing highly technical skills which noFilipino within the Subic Special Economic Zone possesses, as certified bythe Department of Labor and Employment. The names of aliens grantedpermanent residence status and working visas by the Subic BayMetropolitan Authority shall be reported to the Bureau of Immigration andDeportation within thirty (30) days after issuance thereof;

(h) The defense of the zone and the security of its perimeters shall be theresponsibility of the National Government in coordination with the Subic

Bay Metropolitan Authority. The Subic Bay Metropolitan Authority shallprovide and establish its own security and fire-fighting forces; and

(i) Except as herein provided, the local government units comprising theSubic Special Economic Zone shall retain their basic autonomy andidentity. The cities shall be governed by their respective charters and themunicipalities shall operate and function in accordance with Republic ActNo. 7160, otherwise known as the Local Government Code of 1991.

On June 10, 1993, then President Fidel V. Ramos issued Executive Order No. 97 (EO

97), clarifying the application of the tax and duty incentives thus:

Sec. 1. On Import Taxes and Duties .— Tax and duty-free importationsshall apply only to raw materials, capital goods and equipment brought inby business enterprises into the SSEZ. Except for these items, importationsof other goods into the SSEZ, whether by business enterprises or residentindividuals, are subject to taxes and duties under relevant Philippine laws.



The exportation or removal of tax and duty-free goods from the territory ofthe SSEZ to other parts of the Philippine territory shall be subject to dutiesand taxes under relevant Philippine laws.

Sec. 2. On All Other Taxes . — In lieu of all local and national taxes (exceptimport taxes and duties), all business enterprises in the SSEZ shall berequired to pay the tax specified in Section 12(c) of R.A. No. 7227.

Nine days after, on June 19, 1993, the President issued Executive Order No. 97-A (EO97-A), specifying the area within which the tax-and-duty-free privilege wasoperative, viz .:

Sec. 1.1. The Secured Area consisting of the presently fenced-in formerSubic Naval Base shall be the only completely tax and duty-free area in theSSEFPZ [Subic Special Economic and Free Port Zone]. Businessenterprises and individuals (Filipinos and foreigners) residing within theSecured Area are free to import raw materials, capital goods, equipment,and consumer items tax and duty-free. Consumption items, however, mustbe consumed within the Secured Area. Removal of raw materials, capitalgoods, equipment and consumer items out of the Secured Area for sale tonon-SSEFPZ registered enterprises shall be subject to the usual taxes andduties, except as may be provided herein.

On October 26, 1994, the petitioners challenged before this Court the constitutionalityof EO 97-A for allegedly being violative of their right to equal protection of the laws. Ina Resolution dated June 27, 1995, this Court referred the matter to the Court of

Appeals, pursuant to Revised Administrative Circular No. 1-95.

Incidentally, on February 1, 1995, Proclamation No. 532 was issued by PresidentRamos. It delineated the exact metes and bounds of the Subic Special Economic andFree Port Zone, pursuant to Section 12 of RA 7227.

Ruling of the Court of Appeals

Respondent Court held that "there is no substantial difference between the provisionsof EO 97-A and Section 12 of RA 7227. In both, the 'Secured Area' is precise and well-

defined as '. . . the lands occupied by the Subic Naval Base and its contiguousextensions as embraced, covered and defined by the 1947 Military Bases Agreementbetween the Philippines and the United States of America, as amended . . .'" Theappellate court concluded that such being the case, petitioners could not claim that EO97-A is unconstitutional, while at the same time maintaining the validity of RA 7227.

The court a quo also explained that the intention of Congress was to confine thecoverage of the SSEZ to the "secured area" and not to include the "entire Olongapo



City and other areas mentioned in Section 12 of the law." It relied on the followingdeliberarions in the Senate:

Senator Paterno. Thank you, Mr. President. My first question is the extentof the economic zone. Since this will be a free port, in effect, I believe that itis important to delineate or make sure that the delineation will be quiteprecise[. M]y question is: Is it the intention that the entire of Olongapo City,

the Municipality of Subic and the Municipality of Dinalupihan will becovered by the special economic zone or only portions thereof?

Senator Shahani. Only portions, Mr. President. In other words, where theactual operations of the free port will take place.

Senator Paterno. I see. So, we should say, "COVERING THEDESIGNATED PORTIONS OR CERTAIN PORTIONS OF OLONGAPOCITY, SUBIC AND DINALUPIHAN" to make it clear that it is not supposedto cover the entire area of all of these territories.

Senator Shahani. So, the Gentleman is proposing that the words"CERTAIN AREAS". . .

The President. The Chair would want to invite the attention of the Sponsorand Senator Paterno to letter "C," which says: "THE PRESIDENT OF THEPHILIPPINES IS HEREBY AUTHORIZED TO PROCLAIM, DELINEATEAND SPECIFY THE METES AND BOUNDS OF OTHER SPECIALECONOMIC ZONES WHICH MAY BE CREATED IN THE CLARK

MILITARY RESERVATIONS AND ITS EXTENSIONS."

Probably, this provision can be expanded since, apparently, the intention isthat what is referred to in Olongapo as Metro Olongapo is not by itself ipso

jure already a special economic zone.

Senator Paterno. That is correct.

The President. Someone, some authority must declare which portions ofthe same shall be the economic zone. Is it the intention of the author that it

is the President of the Philippines who will make such delineation?

Senator Shahani. Yes Mr. President.

The Court of Appeals further justified the limited application of the tax incentives asbeing within the prerogative of the legislature, pursuant to its "avowed purpose [ofserving] some public benefit or interest." It ruled that "EO 97-A merely implements thelegislative purpose of [RA 7227]."



Disagreeing, petitioners now seek before us a review of the aforecited Court ofAppeals Decision and Resolution.

The Issue

Petitioners submit the following issue for the resolution of the Court:

[W]hether or not Executive Order No. 97-A violates the equal protectionclause of the Constitution. Specifically the issue is whether the provisionsof Executive Order No. 97-A confining the application of R.A. 7227 withinthe secured area and excluding the residents of the zone outside of thesecured area is discriminatory or not. 4

The Court's Ruling

The petition 5 is bereft of merit.

Main Issue :

The Constitionality of EO 37-A

Citing Section 12 of RA 7227, petitioners contend that the SSEZ encompasses (1) theCity of Olongapo, (2) the Municipality of Subic in Zambales, and (3) the area formerlyoccupied by the Subic Naval Base. However, EO 97-A, according to them, narroweddown the area within which the special privileges granted to the entire zone wouldapply to the present "fenced-in former Subic Naval Base" only. It has thereby excludedthe residents of the first two components of the zone from enjoying the benefits

granted by the law. It has effectively discriminated against them without reasonable orvalid standards, in contravention of the equal protection guarantee.

On the other hand, the solicitor general defends, on behalf of respondents, the validityof EO 97-A, arguing that Section 12 of RA 7227 clearly vests in the President theauthority to delineate the metes and bounds of the SSEZ. He adds that the issuancefully complies with the requiretnents of a valid classification.

We rule in favor of the constitutionality and validity of the assailed EO. Said Order isnot violative of the equal protection clause; neither is it discriminatory. Rather, than wefind real and substantive distinctions between the circumstances obtain;ng inside andthose outside the Subic Naval Base, thereby justifying a valid and reasonableclassification.

The fundamental right of equal protection of the laws is not absolute, but is subject toreasonable classification. If the groupings are characterized by substantial distinctionsthat make real differences, one class may be treated and regulated differently fromanother. 6 The classification must also be germane to the purpose of the law and must



apply to all those belonging to the same class. Explaining the nature of the equalprotection guarantee, the Court in Ichong v. Hernandez 8 said:

The equal protection of the law clause is against undue favor and individualor class privilege, as well as hostile discrimination or the oppression ofinequality. It is not intended to prohibit legislation which is limited either [by]the object to which it is directed or by [the] territory within which it is to

operate. It does not demand absolute equality among residents; it merelyrequires that all persons shall be treated alike, under like circumstances and conditions both as to privileges conferred and liabilities enforced. Theequal protection clause is not infringed by legislation which applies only tothose persons falling within a specified class, if it applies alike to allpersons within such class, and reasonable. grounds exist for making adistinction between those who fall within such class and those who do not.

Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane tothe purpose of the law, (3) not be limited to existing conditions only, and (4) applyequally to all members of the same class. 9

We first determine the purpose of the law. From the very title itself, it is clear that RA7227 aims primarily toaccelerate the conversion of military reservations into productive uses . Obviously, the "lands covered under the 1947 Military Bases Agreement" are itsobject. Thus, the law avows this policy:

Sec. 2. Declaration of Policies . — It is hereby declared the policy of theGovernment to accelerate the sound and balanced conversion into

alternative productive uses of the Clark and Subic military reservations andtheir extensions (John Hay Station, Wallace Air Station, O'DonnellTransmitter Station, San Miguel Naval Communications Station and CapasRelay Station), to raise funds by the sale of portions of Metro Manilamilitary camps, and to apply said funds as provided herein for thedevelopment and conversion to productive civilian use of the lands coveredunder the 1947 Military Bases Agreement between the Philippines and theUnited States of America, as amended.

To undertake the above objectives, the same law created the Bases Conversion and

Development Authority, some of whose relevant defined purposes are:

(b) To adopt, prepare and implement a comprehensive and detaileddevelopment plan embodying a list of projects including but not limited tothose provided in the Legislative-Executive Bases Council (LEBC)framework plan for the sound and balanced conversion of the Clark andSubic military reservations and their extensions consistent with ecologicaland environmental standards, into other productive uses to promote the



economic and social development of Central Luzon in particular and thecountry in general;

(c). To encourage the active participation of the private sector intransforming the Clark and Subic military reservations and their extensionsinto other productive uses;

Further, in creating the SSEZ, the law declared it a policy to develop the zone into a"self-sustaining, industrial, commercial, financial and investment center." 10

From the above provisions of the law, it can easily be deduced that the real concern ofRA 7227 is to convert the lands formerly occupied by the US military bases intoeconomic or industrial areas. In furtherance of such objective, Congress deemed itnecessary to extend economic incentives to attract and encourage investors, both localand foreign. Among such enticements are: 11 (1) a separate customs territory within thezone, (2) tax-and-duty-free importation's, (3) restructured income tax rates on businessenterprises within the zone, (4) no foreign exchange control, (5) liberalized regulationson banking and finance, and (6) the grant of resident status to certain investors and ofworking visas to certain foreign executives and workers .

We believe it was reasonable for the President to have delimited the application ofsome incentives to the confines of the former Subic military base. It is this specific areawhich the government intends to transform and develop from its status quo ante as anabandoned naval facility into a self-sustaining industrial and commercial zone,particularly for big foreign and local investors to use as operational bases for theirbusinesses and industries. Why the seeming bias for the big investors? Undeniably,

they are the ones who can pour huge investments to spur economic growth in thecountry and to generate employment opportunities for the Filipinos, the ultimate goalsof the government for such conversion. The classification is, therefore, germane to thepurposes of the law. And as the legal maxim goes, "The intent of a statute is thelaw." 12

Certainly, there are substantial differences between the big investors who are beinglured to establish and operate their industries in the so-called "secured area" and thepresent business operators outside the area. On the one hand, we are talking of billion-peso investments and thousands of new , jobs. On the other hand, definitely none of

such magnitude. In the first, the economic impact will be national; in the second, onlylocal. Even more important, at this time the business activities outside the "securedarea" are not likely to have any impact in achieving the purpose of the law, which is toturn the former military base to productive use for the benefit of the Philippineeconomy. There is, then, hardly any reasonable basis to extend to them the benefitsand incentives accorded in RA 7227. Additionally, as the Court of Appeals pointed out,it will be easier to manage and monitor the activities within the "secured area," which isalready fenced off, to prevent "fraudulent importation of merchandise" or smuggling.



It is well-settled that the equal-protection guarantee does not require territorialuniformity of laws. 13 As long as there are actual and material differences betweenterritories, there is no violation of the constitutional clause. And of course, anyone,including the petitioners, possessing the requisite investment capital can always availof the same benefits by channeling his or her resources or business operations into thefenced-off free port zone.

We believe that the classification set forth by the executive issuance does not applymerely to existing conditions. As laid down in RA 7227, the objective is to establish a"self-sustaining, industrial, commercial, financial and investment center" in the area.There will, therefore, be a long-term difference between such investment center andthe areas outside it.

Lastly, the classification applies equally to all the resident individuals and businesseswithin the "secured area." The residents, being in like circumstances or contributingdirectly to the achievement of the end purpose of the law, are not categorized further.Instead, they are all similarly treated, both in privileges granted and in obligationsrequired.

All told, the Court holds that no undue favor or privilege was extended. Theclassification occasioned by EO 97-A was not unreasonable, capricious or unfounded.To repeat, it was based, rather, on fair and substantive considerations that weregermane to the legislative purpose.

WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision andResolution are hereby AFFIRMED. Costs against petitioners.1âwphi1.nêt

SO ORDERED.

Davide, Jr., C.J., Romero, Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Martinez,Quisumbing, Purisima, Pardo, Buena and Gozaga-Reyes, JJ., concur.

G.R. No. L-6093 February 24, 1954

THE SHELL CO. OF P.I., LTD., plaintiff-appellant,vs.

E. E. VAÑO, as Municipal Treasurer of the Municipality of Cordova, Province ofCebu, defendant-appellee.

C.J. Johnston and A.P. Deen for appellant.Provincial Fiscal Jose C. Borromeo and Assistant Provincial Fiscal Ananias V. Maribao for appellee.

PADILLA, J.:



The Municipal Council of Cordova, Province of Cebu, adopted the followingordinances: No. 10, series of 1946, which imposes an annual tax of P150 onoccupation or the exercise of the privilege of installation manager; No. 9, series of1947, which imposes an annual tax of P40 for local deposits in drums of combustibleand inflammable materials and an annual tax of P200 for tin can factories; and No. 11,series of 1948, which imposes an annual tax of P150 on tin can factories having amaximum output capacity of 30,000 tin cans. The Shell Co. of P.I. Ltd., a foreign

corporation, filed suit for the refund of the taxes paid by it, on the ground that theordinances imposing such taxes are ultra vires. The defendant denies that they are so.The controversy was submitted for judgment upon stipulation of facts which reads asfollows:

Come now the parties in the above-entitled case by their undersigned attorneysand hereby agree to the following stipulation of facts:

1. That the parties admit the allegations contained in Paragraph 1 of theAmended Complaint referring to residence, personality, and capacity of theparties except the fact that E.E. Vaño is now replaced by F.A. Corbo asMunicipal Treasurer of Cordova, Cebu;

2. That the parties admit the allegations contained in paragraph 2 of theAmended Complaint. Official Receipts Nos. A-1280606, A-37607422, A-3769852and A-21030388 are herein marked as Exhibits A, B, C, and D, respectively forthe plaintiff;

3. That the parties admit that payments made under Exhibits B, C, and D were

all under protest and plaintiff admits that Exhibit A was not paid under protest;

4. That the parties admit that Official Receipt No. A-1280606 for P40 and OfficialReceipt No. A-3760742 for P200 were collected by the defendant by virtue ofOrdinance No. 9, (Secs. E-4 and E-6, respectively) under Resolution No. 31,series of 1947, enacted December 15, 1947, approved by the Provincial Board ofCebu in its Resolution No. 644, series of 1948. Copy of said Ordinance No. 9,series of 1947, is herein marked as Exhibit "E" for the plaintiff, and as Exhibit "I"for the defendant;

5. That the parties admit that Official Receipt No. A-3760852 for P150 was paidfor taxes imposed on Installation Managers, collected by the defendant by virtueof Ordinance No. 10 (section 3, E-12) under Resolution No. 38, series of 1946,approved by the Provincial Board of Cebu in its Resolution No. 1070, series of1946. Copy of .said Ordinance No. 10, series of 1946 is marked as Exhibit "F" forthe plaintiff and as Exhibit "2" for the defendant;

6. That the parties admit that Official Receipt No. A-21030388 for P5,450 waspaid by plaintiff and that said amount was collected by defendant by virtue of



Ordinance No. 11, series of 1948 (under Resolution No. 46) enacted August 31,1948 and approved by the Provincial Board of Cebu in its Resolution No. 115,series of 1949, and same was approved by the Honorable Secretary of Financeunder the provisions of section 4 of Commonwealth Act No. 472. Copy of saidOrdinance No. 11, series of 1948 is herein marked as Exhibit "G" for the plaintiff,and Exhibit "3" for the defendant. Copy of the approval of the HonorableSecretary of Finance of the same Ordinance is herein marked as Exhibit "4" for

the defendant.

Wherefore, aside from oral evidence which may be offered by the parties andother points not covered by this stipulation, this case is hereby submitted uponthe foregoing agreed facts and record of evidence.

Cebu City, Philippines, January 20, 1950.

THE SHELL CO. OF P.I. LTD.

(Sgd.) L. DE BLECHYNDENPlaintiff

C.D. JOHNSTON & A.P. DEEN

(Sgd.) A.P. DEENAttys. for the plaintiff

THE MUNICIPALITY OF CORDOVA(Sgd.) F.A. CORBO

Defendant

(Sgd.) JOSE C. BORROMEOProvincial Fiscal

Attorney for the defendant

(Record on Appeal, pp. 15-18.)

The parties reserved the right to introduce parole evidence but no such evidence was

submitted by either party. From the judgment holding the ordinances valid anddismissing the complaint the plaintiff has appealed.

It is contended that as the municipal ordinance imposing an annual tax of P40 for"minor local deposit in drums of combustible and inflammable materials," and of P200"for tin factory" was adopted under and pursuant to section 2244 of the RevisedAdministrative Code, which provides that the municipal council in the exercise of theregulative authority may require any person engaged in any business or occupation,such as "storing combustible or explosive materials" or "the conducting of any otherbusiness of an unwholesome, obnoxious, offensive, or dangerous character," to obtaina permit for which a reasonable fee, in no case to exceed P10 per annum, may becharged, the annual tax of P40 and P200 are unauthorized and illegal. The permit andthe fee referred to may be required and charged by the Municipal Council of Cordovain the exercise of its regulative authority, whereas the ordinance which imposes thetaxes in question was adopted under and pursuant to the provisions of CommonwealthAct No. 472, which authorizes municipal councils and municipal district councils "toimpose license taxes upon persons engaged in any occupation or business, orexercising privileges in the municipality or municipal district, by requiring them tosecure licenses at rates fixed by the municipal council or municipal district council,"



which shall be just and uniform but not "percentage taxes and taxes on specifiedarticles." Likewise, Ordinance No. 10, series of 1946, which imposes an annual tax ofP150 on "installation manager" comes under the provisions of Commonwealth Act No.472. But it is claimed that "installation manager" is a designation made by the plaintiffand such designation cannot be deemed to be a "calling" as defined in section 178 ofthe National Internal Revenue Code (Com. Act No. 466), and that the installationmanager employed by the plaintiff is a salaried employee which may not be taxed by

the municipal council under the provisions of Commonwealth Act No. 472. Thiscontention is without merit, because even if the installation manager is a salariedemployee of the plaintiff, still it is an occupation "and one occupation or line of businessdoes not become exempt by being conducted with some other occupation or businessfor which such tax has been paid'1 and the occupation tax must be paid "by eachindividual engaged in a calling subject thereto."2 And pursuant to section 179 of theNational Internal Revenue Code, "The payment of . . . occupation tax shall not exemptany person from any tax, . . . provided by law or ordinance in places where such . . .occupation in . . . regulated by municipal law, nor shall the payment of any such tax be

held to prohibit any municipality from placing a tax upon the same . . . occupation, forlocal purposes, where the imposition of such tax is authorized by law." It is true that,according to the stipulation of facts, Ordinance No. 10, series of 1946, was approvedby the Provincial Board of Cebu in its Resolution No. 1070, series of 1946, and that itdoes not appear that it was approved by the Department of Finance, as provided forand required in section 4, paragraph 2, of Commonwealth Act No. 472, the rate ofmunicipal tax being in excess of P50 per annum. But at this point on the approval ofthe Department of Finance was not raised in the court below, it cannot be raised for thefirst time on appeal. The issue joined by the parties in their pleadings and the pointraised by the plaintiff is that the municipal council was not empowered to adopt the

ordinance and not that it was not approved by the Department of Finance. The fact thatit was not stated in the stipulation of facts justifies the presumption that the ordinancewas approved in accordance with law.

The contention that the ordinance is discriminatory and hostile because there is noother person in the locality who exercises such "designation" or occupation is alsowithout merit, because the fact that there is no other person in the locality whoexercises such a "designation" or calling does not make the ordinance discriminatoryand hostile, inasmuch as it is and will be applicable to any person or firm who

exercises such calling or occupation named or designated as "installation manager."

Lastly, Ordinance No. 11, series of 1948, which imposes a municipal tax of P150 on tincan factories having a maximum annual output capacity of 30,000 tin cans which,according to the stipulation of facts, was approved by the Provincial Board of Cebu andthe Department of Finance, is valid and lawful, because it is neither a percentage taxnor one on specified articles which are the only exceptions provided in section 1,Commonwealth Act No. 472. Neither does it fall under any of the prohibitions providedfor in section 3 of the same Act. Specific taxes enumerated in the National Internal



Revenue Code are those that are imposed upon "things manufactured or produced inthe Philippines for domestic sale or consumption" and upon "things imported from theUnited States and foreign countries," such as distilled spirits, domestic denaturedalcohol, fermented liquors, products of tobacco, cigars and cigarettes, matches,mechanical lighters, firecrackers, skimmed milk, manufactured oils and other fuels,coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards,sacharine.3 And it is not a percentage tax because it is tax on business and the

maximum annual output capacity is not a percentage, because it is not a share or a taxbased on the amount of the proceeds realized out of the sale of the tin cansmanufactured therein but on the business of manufacturing tin cans having a maximumannual output capacity of 30,000 tin cans.

In an action for refund of municipal taxes claimed to have been paid and collectedunder an illegal ordinance, the real party in interest is not the municipal treasurer butthe municipality concerned that is empowered to sue and be sued.4

The judgment appealed from is hereby affirmed, with costs against the appellant.

Paras, C.J., Pablo, Bengzon, Montemayor, Reyes, Jugo, Bautista Angelo, Labrador,Concepcion and Diokno, JJ.,concur.

CITY OF BAGUIO, plaintiff-appellee,vs.FORTUNATO DE LEON, defendant-appellant.

The City Attorney for plaintiff-appellee.

Fortunato de Leon for and in his own behalf as defendant-appellant.

FERNANDO, J.:

In this appeal, a lower court decision upholding the validity of an ordinance1 of the Cityof Baguio imposing a license fee on any person, firm, entity or corporation doingbusiness in the City of Baguio is assailed by defendant-appellant Fortunato de Leon.He was held liable as a real estate dealer with a property therein worth more thanP10,000, but not in excess of P50,000, and therefore obligated to pay under suchordinance the P50 annual fee. That is the principal question. In addition, there has

been a firm and unyielding insistence by defendant-appellant of the lack of jurisdictionof the City Court of Baguio, where the suit originated, a complaint having been filedagainst him by the City Attorney of Baguio for his failure to pay the amount of P300 aslicense fee covering the period from the first quarter of 1958 to the fourth quarter of1962, allegedly, inspite of repeated demands. Nor was defendant-appellant agreeableto such a suit being instituted by the City Treasurer without the consent of the Mayor,which for him was indispensable. The lower court was of a different mind.



In its decision of December 19, 1964, it declared the above ordinance as amended,valid and subsisting, and held defendant-appellant liable for the fees therein prescribedas a real estate dealer. Hence, this appeal. Assume the validity of such ordinance, andthere would be no question about the liability of defendant-appellant for the abovelicense fee, it being shown in the partial stipulation of facts, that he was "engaged inthe rental of his property in Baguio" deriving income therefrom during the periodcovered by the first quarter of 1958 to the fourth quarter of 1962.

The source of authority for the challenged ordinance is supplied by Republic Act No.329, amending the city charter of Baguio2 empowering it to fix the license fee andregulate "businesses, trades and occupations as may be established or practiced inthe City."

Unless it can be shown then that such a grant of authority is not broad enough to justifythe enactment of the ordinance now assailed, the decision appealed from must beaffirmed. The task confronting defendant-appellant, therefore, was far from easy. Whyhe failed is understandable, considering that even a cursory reading of the aboveamendment readily discloses that the enactment of the ordinance in question findssupport in the power thus conferred.

Nor is the question raised by him as to the validity thereof novel in character. In Medinav. City of Baguio ,3 the effect of the amendatory section insofar as it would expand theprevious power vested by the city charter was clarified in these terms: "Appellantsapparently have in mind section 2553, paragraph (c) of the Revised AdministrativeCode, which empowers the City of Baguio merely to impose a license fee for thepurpose of rating the business that may be established in the city. The power as thus

conferred is indeed limited, as it does not include the power to levy a tax. But on July15, 1948, Republic Act No. 329 was enacted amending the charter of said city andadding to its power to license the power to tax and to regulate. And it is preciselyhaving in view this amendment that Ordinance No. 99 was approved in order toincrease the revenues of the city. In our opinion, the amendment above adverted toempowers the city council not only to impose a license fee but also to levy a tax forpurposes of revenue, more so when in amending section 2553 (b), the phrase 'asprovided by law' has been removed by section 2 of Republic Act No. 329. The citycouncil of Baguio, therefore, has now the power to tax, to license and to regulateprovided that the subjects affected be one of those included in the charter. In thissense, the ordinance under consideration cannot be considered ultra vires whether itspurpose be to levy a tax or impose a license fee. The terminology used is of noconsequence."

It would be an undue and unwarranted emasculation of the above power thus grantedif defendant-appellant were to be sustained in his contention that no such statutoryauthority for the enactment of the challenged ordinance could be discerned from thelanguage used in the amendatory act. That is about all that needs to be said inupholding the lower court, considering that the City of Baguio was not devoid of



authority in enacting this particular ordinance. As mentioned at the outset, however,defendant-appellant likewise alleged procedural missteps and asserted that thechallenged ordinance suffered from certain constitutional infirmities. To such pointsraised by him, we shall now turn.

1. Defendant-appellant makes much of the alleged lack of jurisdiction of the City Courtof Baguio in the suit for the collection of the real estate dealer's fee from him in the

amount of P300. He contended before the lower court, and it is his contention now,that while the amount of P300 sought was within the jurisdiction of the City Court ofBaguio where this action originated, since the principal issue was the legality andconstitutionality of the challenged ordinance, it is not such City Court but the Court ofFirst Instance that has original jurisdiction.

There is here a misapprehension of the Judiciary Act. The City Court has jurisdiction.Only recently, on September 7, 1968 to be exact, we rejected a contention similar incharacter in Nemenzo v. Sabillano .4 The plaintiff in that case filed a claim for thepayment of his salary before the Justice of the Peace Court of Pagadian, Zamboangadel Sur. The question of jurisdiction was raised; the defendant Mayor asserted thatwhat was in issue was the enforcement of the decision of the Commission of CivilService; the Justice of the Peace Court was thus without jurisdiction to try the case.The above plea was curtly dismissed by Us, as what was involved was "an ordinarymoney claim" and therefore "within the original jurisdiction of the Justice of the PeaceCourt where it was filed, considering the amount involved." Such is likewise thesituation here.

Moreover, in City of Manila v. Bugsuk Lumber Co.,5 a suit to collect from a defendant

this license fee corresponding to the years 1951 and 1952 was filed with the MunicipalCourt of Manila, in view of the amount involved. The thought that the municipal courtlacked jurisdiction apparently was not even in the minds of the parties and did notreceive any consideration by this Court.

Evidently, the fear is entertained by defendant-appellant that whenever a constitutionalquestion is raised, it is the Court of First Instance that should have original jurisdictionon the matter. It does not admit of doubt, however, that what confers jurisdiction is theamount set forth in the complaint. Here, the sum sought to be recovered was clearlywithin the jurisdiction of the City Court of Baguio.

Nor could it be plausibly maintained that the validity of such ordinance being open toquestion as a defense against its enforcement from one adversely affected, the mattershould be elevated to the Court of First Instance. For the City Court could rely on thepresumption of the validity of such ordinance,6 and the mere fact, however, that in theanswer to such a complaint a constitutional question was raised did not suffice to oustthe City Court of its jurisdiction. The suit remains one for collection, the lack of validitybeing only a defense to such an attempt at recovery. Since the City Court is possessedof judicial power and it is likewise axiomatic that the judicial power embraces the



ascertainment of facts and the application of the law, the Constitution as the highestlaw superseding any statute or ordinance in conflict therewith, it cannot be said that aCity Court is bereft of competence to proceed on the matter. In the exercise of suchdelicate power, however, the admonition of Cooley on inferior tribunals is well worthremembering. Thus: "It must be evident to any one that the power to declare alegislative enactment void is one which the judge, conscious of the fallibility of thehuman judgment, will shrink from exercising in any case where he can conscientiously

and with due regard to duty and official oath decline the responsibility."7 While itremains undoubted that such a power to pass on the validity of an ordinance alleged toinfringe certain constitutional rights of a litigant exists, still it should be exercised withdue care and circumspection, considering not only the presumption of validity but alsothe relatively modest rank of a city court in the judicial hierarchy.

2. To repeat the challenged ordinance cannot be considered ultra vires as there ismore than ample statutory authority for the enactment thereof. Nonetheless, its validityon constitutional grounds is challenged because of the allegation that it imposed

double taxation, which is repugnant to the due process clause, and that it violated therequirement of uniformity. We do not view the matter thus.

As to why double taxation is not violative of due process, Justice Holmes made clear inthis language: "The objection to the taxation as double may be laid down on one side.... The 14th Amendment [the due process clause] no more forbids double taxation thanit does doubling the amount of a tax, short of confiscation or proceedingsunconstitutional on other grounds."8With that decision rendered at a time whenAmerican sovereignty in the Philippines was recognized, it possesses more than just apersuasive effect. To some, it delivered the coup de grace to the bogey of double

taxation as a constitutional bar to the exercise of the taxing power. It would seemthough that in the United States, as with us, its ghost as noted by an eminent critic, stillstalks the juridical state. In a 1947 decision, however,9 we quoted with approval thisexcerpt from a leading American decision:10 "Where, as here, Congress has clearlyexpressed its intention, the statute must be sustained even though double taxationresults."

At any rate, it has been expressly affirmed by us that such an "argument againstdouble taxation may not be invoked where one tax is imposed by the state and theother is imposed by the city ..., it being widely recognized that there is nothinginherently obnoxious in the requirement that license fees or taxes be exacted withrespect to the same occupation, calling or activity by both the state and the politicalsubdivisions thereof."11

The above would clearly indicate how lacking in merit is this argument based ondouble taxation.

Now, as to the claim that there was a violation of the rule of uniformity established bythe constitution. According to the challenged ordinance, a real estate dealer who



leases property worth P50,000 or above must pay an annual fee of P100. If theproperty is worth P10,000 but not over P50,000, then he pays P50 and P24 if the valueis less than P10,000. On its face, therefore, the above ordinance cannot be assailed asviolative of the constitutional requirement of uniformity. In Philippine Trust Company v.Yatco ,12 Justice Laurel, speaking for the Court, stated: "A tax is considered uniformwhen it operates with the same force and effect in every place where the subject maybe found."

There was no occasion in that case to consider the possible effect on such aconstitutional requirement where there is a classification. The opportunity camein Eastern Theatrical Co. v. Alfonso .13 Thus: "Equality and uniformity in taxation meansthat all taxable articles or kinds of property of the same class shall be taxed at thesame rate. The taxing power has the authority to make reasonable and naturalclassifications for purposes of taxation; ..." About two years later, Justice Tuason,speaking for this Court in Manila Race Horses Trainers Assn. v. De la Fuente 14 incorporated the above excerpt in his opinion and continued: "Taking

everything into account, the differentiation against which the plaintiffs complainconforms to the practical dictates of justice and equity and is not discriminatory withinthe meaning of the Constitution."

To satisfy this requirement then, all that is needed as held in another case decided twoyears later, 15 is that the statute or ordinance in question "applies equally to all persons,firms and corporations placed in similar situation." This Court is on record as acceptingthe view in a leading American case16 that "inequalities which result from a singling outof one particular class for taxation or exemption infringe no constitutional limitation."17

It is thus apparent from the above that in much the same way that the plea of doubletaxation is unavailing, the allegation that there was a violation of the principle ofuniformity is inherently lacking in persuasiveness. There is no need to pass upon theother allegations to assail the validity of the above ordinance, it being maintained thatthe license fees therein imposed "is excessive, unreasonable and oppressive" and thatthere is a failure to observe the mandate of equal protection. A reading of theordinance will readily disclose their inherent lack of plausibility.

3. That would dispose of all the errors assigned, except the last two, which wouldpredicate a grievance on the complaint having been started by the City Treasurer

rather than the City Mayor of Baguio. These alleged errors, as was the case with theothers assigned, lack merit.

In much the same way that an act of a department head of the national government,performed within the limits of his authority, is presumptively the act of the Presidentunless reprobated or disapproved,18 similarly the act of the City Treasurer, whoseposition is roughly analogous, may be assumed to carry the seal of approval of the CityMayor unless repudiated or set aside. This should be the case considering that suchcity official is called upon to see to it that revenues due the City are collected. When



administrative steps are futile and unavailing, given the stubbornness and obduracy ofa taxpayer, convinced in good faith that no tax was due, judicial remedy may beresorted to by him. It would be a reflection on the state of the law if such fidelity to dutywould be met by condemnation rather than commendation.

So, much for the analytical approach. The conclusion thus reached has areinforcement that comes to it from the functional and pragmatic test. If a city treasurer

has to await the nod from the city mayor before a municipal ordinance is enforced, thenopportunity exists for favoritism and undue discrimination to come into play. Whatevervalid reason may exist as to why one taxpayer is to be accorded a treatment deniedanother, the suspicion is unavoidable that such a manifestation of official favor couldhave been induced by unnamed but not unknown consideration. It would not be goingtoo far to assert that even defendant-appellant would find no satisfaction in such a sadstate of affairs. The more desirable legal doctrine therefore, on the assumption that achoice exists, is one that would do away with such temptation on the part of bothtaxpayer and public official alike.

WHEREFORE, the lower court decision of December 19, 1964, is hereby affirmed.Costs against defendant-appellant.

Concepcion, CJ., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and Capistrano, JJ., concur.Zaldivar, J., is on leave.

EASTERN THEATRICAL CO., INC., ET AL., plaintiffs-appellants,vs.

VICTOR, ALFONSO as City Treasurer of Manila, THE MUNICIPAL BOARD OF THECITY OF MANILA, and JUAN NOLASCO, as Mayor of the City ofManila, defendants-appellees.

Francisco Zulueta and Poblador Jr. for appellants.City Fiscal Jose P. Bengzon and Assistant City Fiscal Julio Villamor for appellees.Assistant Solicitor General Carmelino G. Alvendia, Solicitor Guillermo E.Torres and Manuel D. Baldeo as amicus curiae.

PERFECTO, J.:

Twelve corporation engaged in motion picture business have initiated theseproceeding through a complaint dated May 5, 1946, to impugn the validity of OrdinanceNo. 2958 of the City of Manila which was enacted by the municipalBoard of said city onApril 25 1946 approved by the Mayor on April 27, 1946 and took effect on May 1, 1946said ordinance reading as follows:

AN ORDINANCE IMPOSING A FEE ON THE PRICE OF EVERYADMISSION TICKET SOLD BY CINEMATOGRAPHS, THEATERS



VAUDEVILLE COMPANIES THEATRICAL SHOWS AND BOXINGEXHIBITION AND PROVIDING FOR OTHER PURPOSES.

SEC. 1. In addition to the fees paid by cinematographers, theaters, vaudevillecompanies, theatrical shows and boxing exhibitions, as provided for in sections633 and 778 of Ordinance No. 1600, known as the Revised Ordinance of the Cityof Manila, as amended, there shall be collected from the place of amusement

which are specifically mentioned above the following fees on the price of everyadmission ticket sold by such enterprises:

a . For every ticket sold the price of whichis from P0.25 to P0.99

P0.05

b . For every ticket sold the price of whichis from P1 to P1.99

0.10

c . For every ticket sold the price of whichis from P2 to P2.99

0.15

d . for every ticket sold the price of whichis from P3 to P4.99

0.20

e . or every ticket sold the price of whichis from P5 to P5.99

0.25

f. For every ticket sold the price of whichis from P0 to P14.99

0.35

g . For ticket sold thee price of which isfrom P15 or more

0.50

SEC. 2 It shall be the duty of every proprietor lessee, promoter, or operatorofsuch cinematographs, theater, vaudeville companies, theatrical show and boxingexhibition to provide himself with tickets which shall be serially numbered,indication therein the name of amusement place and the fee charge foradmission. Before such ticket are sold he same shall be presented to the office ofthe city Treasurer for registration. Tickets once issued and presented at the gateof entrance shall be cut by the gatekeeper into halves, the first half to be returnedto the customer and the other half to be retained by the gate keeper.

It shall also be the duty of said proprietor lessee promoter or operator to deliverto the Office of the City Treasurer the fees corresponding to the number of ticketold by him within two days after the performances or exhibition has taken place.

SEC. 3. The fees herein prescribed shall not be paid where the admission fees orcharge are collection for and in behalf of any charitable education or religioninstitution or association.



All place of amusement which are operate by U.S. Army and Navy with fundbelonging to the U.S. Government are hereby exempted from fees hereinimposed.

SEC. 4. Any person violation any of the provision of this ordinance shall uponconviction thereof be punished by a fine of not more than P200 or byimprisonment for not more than six months or by both such fine and

imprisonment in the discretion of the court. If the violation is committed by theclub firm or corporation the manager the managing director or person chargedwith the management of the business of such club firm or corporation shall becriminally responsible therefor.

SEC. 5. This Ordinance shall take effect on the May 1, 1946.

Plaintiffs, operator of theaters in Manila And distributor of local or imported films allegethat they are interested in the provision of section 1,2 and 4 of said ordinance whichthey impugn as null and void upon the following grounds: (a ) For violation theConstitution more particular the provision regarding the uniformity and equality oftaxation and thee equal protection of the laws; (b ) because the Municipal Board ofManila exceeded and over-stepped the power granted it the Charter of the City ofManila; (c ) because it contravenes violates and is inconsistent with, existingnationallegislation more particularly revenue and tax laws and (d ) because it is unfair,unjust, arbitrary capricious unreasonable oppressive and is contrary to and violationour basic and recognizes principles of taxation and licensing laws.

Defendants allege as affirmative defenses the following: (a ) That the ordinance was

passed by the Municipal Board of Manila by virtue of its express legislative power totax fix the license fee and regulate the business of theaters, cinematographs andfurther to fix the location of and to tax, fix the license fee for and regulate the businessof theatrical performances public exhibition circus and other performances and placesof amusement; (b ) that the graduated tax required by said ordinance being applied toall cinematographs, theaters, vaudeville companies theatricalshow and boxingexhibitions similarly situated and as a class without distinction or exception the samedoes not violate the prohibition against uniformity and equality of taxation; (c ) that thegraduated tax onadmission tickets to theaters and other places of amusement imposedby the National Internal Revenue Code (Commonwealth Act No. 466) is collected by

and for the purposes of the National Government, whereas, Ordinance No.2958imposes and requires the collection of a similar tax by and for the purposes of theGovernment of the City of Manila, and there is no case of double taxation, (d ) that saidordinance having been enacted under the express power of the Municipal Board to taxfor revenue as distinguishedfrom its power to license for purely police purposes, thefact that the amount collected thereunder are higher than what are needed for policeregulation and supervision does not render said ordinance unfair unjust capriciousunreasonable and oppressive; (e ) that consideration the nature of the business of the



plaintiffs and the enormous volume of business they handle the graduated tax fixed bythe ordinance is not unreasonable.

Defendants allege also that since May 1, 1946, when the ordinance in question tookeffect plaintiffs have been charging the theater-going public increased prices foradmission to the cinematographs owned and operated to the graduated tax imposedby said ordinance and as a result while refusing to pay said tax but at the same time

collecting an amount equal to said tax plaintiffs have taken undue advantage of saidordinance to realized more profits.

On September 5, 1946, Judge Emilio Pena of the court of first Instance of Manilarendered a decision upholding the validity of Ordinance No. 2958.

Plaintiffs appellants assign in the their brief three errors committed by the trial court.We will consider them separately.

Appellants contend that the lower court erred in holding that under section 2444 (m ) of

the Revised administrative Code the Municipal Board of the City ofManila had thepower to enact Ordinance No. 2958.

Section 2444 (m ) of the Revised Administrative code reads as follows:

To tax fix the license fee and regulate the business of hotels restaurantsrefreshment places, cafes, lodging houses, boarding houses livery garageswarehouses, pawnshops theaters, cinematographs; and further to fix the locationof and to tax fix the license fee for and regulate the businessof lively stables, thelicense fee for and regulate the business of livery stable, boarding stables,embalmers, public billiard table public pool tables, bowling alleys, dance halls,public dancing halls, cabarets, circusand other similar parades, public vehicles,race tracks, horse races,Junk dealers, theatrical performances, publicexhibitions, circus andother performances and places of amusements, matchfactories, blacksmith shops, foundries, steam boilers, lumber yards, shipyards,thestorage and sale of gunpowder, tar, pitch, resin, coal, oil, gasoline,benzene,turpentine, 'hemp, cotton, nitroglycerin, petroleum or any Ofthe products thereofand of all other highly combustible or explosivematerials and other establishmentlikely to endanger the public safety or give rise to conflagration or explosion and

subject to the provision of ordinance issue by the (Philippines Health Service)Bureau of Health in accordance with law tanneries, renders tallow chandlersbone factories and soap factories.

Appellants line of argument runs as follows:

By virtue of the specific power granted in the above quoted provision of the RevisedAdministration Code Ordinance No. 2958 was enacted.



On August 7, 1940 the National Assembly enacted Commonwealth Act No. 466,known as the National Internal Revenue Code section 18, 260 and 261 of which readas follows:

SEC. 18. Sources of revenue . — The following taxes fees and charges aredeemed to be national internal revenue taxes:

(a ) Income tax;(b ) Estate inheritance and gift taxes;(c ) Specific taxes on certain articles;(d ) Privilege taxes on business or occupation;(e ) Documentary stamp taxes;(f) Mining taxes;(g ) Miscellaneous taxes fees and charges, namely, taxes on banks andinsurance companies franchise taxes on amusements charges on forestproduct fees for sealing weights and measures firearms license fees radioregistration fees and water rentals.

SEC. 260. Amusement taxes . — There shall be collected from the proprietor,lessee, or operation of theater cinematographs, concert halls, circuses, boxingexhibition and other places of amusement the following taxes:

(a ) When the amount paid for admission exceeds twenty-nine centavos, twocentavos on each admission;

(b ) When the amount paid for admission exceeds twenty-nine but does not

exceed thirty-nine centavos, three centavos on each admission;

(c ) When the amount paid for admission exceeds thirty-nine centavos but doesnot exceed forty-nine centavos four centavos on each admission.

(d ) When the amount paid for admission exceeds forty-nine centavos but doesnot exceed fifty-nine centavos five admission.

(e ) When the amount paid for admission exceeds fifty-nine centavos but does notexceed sixty-nine centavos six centavos on each admission.

(f ) When the amount paid for admission exceeds sixty-nine centavos but doesnot exceed seventy nine centavos seven centavos on each admission.

(g ) When the amount paid for admission exceeds seventy nine centavos butdoes not exceed eighty-nine centavos eight centavos on each admission;

(h ) When the amount paid for admission exceeds eighty-nine centavos but doesnot exceed ninty-nine centavos, nine centavos on each admission;



(i ) When the amount paid for admission exceeds ninety-nine centavos, tencentavos on each admission.

In the case of theaters or cinematographs, the taxes herein prescribed shall firstbe decuted and withheld by the proprietros, lessees, or operators of suchtheaters or cinematogrphs and paid to the Collector of Internal Revenue beforethe gross receipts are divided between the proprietros, lessees, or operators of

the theaters of cinematographs and the distributors of the cinematographic films.

In the case of cockpits, race tracks, and cabarets, there shall be collected fromthe proprietor, lessee, or operator a tax equivalent to ten per centum of the grossreceipts, irrespective of whether or not any amount is charged or paid foradmission: Provided, however, That in the case of race tracks, this tax is inaddition to the privilege tax prescribed in seciton 193. for the purpose of theamusement tax, the term "gross receipts" embraces all the receipts of theproprietor, lessee, or operator of the amusement place, excluding the receiptsderived by him from the sale of liquors, beverages, or other articles subject tospecific tax, or from any business subject to tax under this Code. (This sectionwas amended by section 8, Republic Act No. 39, effective October 1, 1946. Weare quoting the original provision to show the status of the law when theOrdinance was passed.)

SEC. 261. Exemption . — The tax herein imposed shall not be paid where theadmission fee or charges are collected by or for and in behalf of any religious,charitable, scientific, or educational institution or association, and where no partof the net proceeds of such admission fees or charges inures to the benefit of

any private stockholder or individual.

Ordinance No. 2958 does not specify the kind of the tax sought to be imposed but theseven schedules and other details of said ordinance are, in every respect, identicalwith the amusement tax provided by section 260 of Commonwealth Act No. 466.

But, plaintiffs argue, that section 2444(m) of the Revised Administrative Code confersupon the City of Manila the power to impose a tax on business but not on amusementand, consequently, Ordinance No. 2958 was enacted beyond the charter powers of theCity of Manila.

The whole argument of plaintiffs hinges, therefore, on the assumption that the powergranted to the City of Manila by section 2444(m) of the Revised Administrative Code islimited to the authority to impose a tax on business, with exclusion of the power toimpose a tax amusement; but, the assumption is based on an arbitrary labeling of thekind of tax authorized by said section 2444(m). The distinction made by plaintiffs as tothe power to tax on business and the power to tax on amusement has no ground underthe provisions of section 2444(m) of the Revised Administrative Code. The tax thereinauthorized cannot be defined as tax on business and cannot be restricted within a



smaller scope than what is authorized by the words used, to the extent of excludingwhat plaintiffs describe as tax on amusement.

The very fact that section 2444 (m) of the Revised Administrative Code includestheaters, cinematographs, public billiard tables, public pool tables, bowling alleys,dance halls, public dancing halls, cabarets, circuses and other similar places, racetracks, horse races, theatrical performances, public exhibition, circus and other

performances and places of amusements, will show conclusively that the power to taxamusement is expressly included within the power granted by section 2444(m) of theRevised Administrative Code.

Plaintiffs-appellants contend that the lower court erred in not holding that section 2444(m) of the Revised Administrative Code was repealed or the power therein containedwas withdrawn by the National Assembly by the enactment of Commonwealth Act No.466 known as the National Internal Revenue Code.

In support of this contention, plaintiffs aver that the Charter of the City of Manila,containing section 2444(m) of the Revised Administrative Code, was enacted onDecember 8, 1929. On April 25, 1940, the National Assembly enacted CommonwealthAct No. 466, including provisions on amusement tax, covering the whole field ontaxation and provided for more than what the ordinance in question has provided. As aresult, there are two taxing powers seeking to occupy exactly the same field oflegislation, and so the apparent conflict must be resolved with the conclusion that, withthe enactment of Commonwealth Act No. 466, as later amended by Republic Act No.39, section 2444(m) of the Revised Administrative Code has been impliedly repealedand the power therein delegated to the City of Manila withdrawn.

We see absolutely no force in plaintiffs' contention. The conflict pointed out by them isimaginary. Both provisions of law may stand together and be enforced at the sametime without any incompatibility among themselves.

Finally, plaintiffs contend that the trial court erred in not holding that Ordinance No.2958 violated the principle of equality and uniformity of taxation enjoined by theConstitution (sec. 22, sub-sec. 1, Art. VI, Constitution of the philippines).

To support this contenttion, appellantts point out to the fact that the ordinance in

question does not tax "many more kinds of amusements" than those therein specified,such as "race tracks, cockpits, cabarets, concert halls, circuses, and other places ofamusement." the argument has absolutely no merit. The fact that some places ofamusement are not taxed while others, such as cinematographs, theaters, vaudevillecompanies, theatrical shows, and boxing exhibitions and other kinds of amusements orplaces of amusement are taxed, is no argument at all against the equality anduniformity of the tax imposition. Equality and uniformity of the tax imposition. Equalityand uniformity in taxation means that all taxable articles or kinds of property of thesame class shall be taxed at the same rate. The taxing power has the authority to



make reasonable and natural classifications for purposes of taxation; and theappellants cannot point out what places of amusement taxed by the ordinance do notconstitute a class by themselves and which can be confused with those not included inthe ordinance.

The judgment of the trial court is affirmed with costs against appellants.

Paras, Pablo, Bengzon, Tuason, Montemayor and Reyes, JJ., concur.Perfecto, J., We certify that the Chief Justice voted to affirm the appealed judgment.

ANTERO M. SISON, JR., petitioner,vs.RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue;ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMASTOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA,Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit,and CESAR E. A. VIRATA, Minister of Finance, respondents.

Antero Sison for petitioner and for his own behalf.

The Solicitor General for respondents.

FERNANDO, C.J.:

The success of the challenge posed in this suit for declaratory relief or prohibition

proceeding 1 on the validity of Section I of Batas Pambansa Blg. 135 depends upon ashowing of its constitutional infirmity. The assailed provision further amends Section 21of the National Internal Revenue Code of 1977, which provides for rates of tax oncitizens or residents on (a) taxable compensation income, (b) taxable net income, (c)royalties, prizes, and other winnings, (d) interest from bank deposits and yield or anyother monetary benefit from deposit substitutes and from trust fund and similararrangements, (e) dividends and share of individual partner in the net profits of taxablepartnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtuethereof, "he would be unduly discriminated against by the imposition of higher rates of

tax upon his income arising from the exercise of his profession vis-a-vis those whichare imposed upon fixed income or salaried individual taxpayers. 4 He characterizes theabove sction as arbitrary amounting to class legislation, oppressive and capricious incharacter 5For petitioner, therefore, there is a transgression of both the equalprotection and due process clauses 6 of the Constitution as well as of the rule requiringuniformity in taxation. 7

The Court, in a resolution of January 26, 1982, required respondents to file an answerwithin 10 days from notice. Such an answer, after two extensions were granted the



Office of the Solicitor General, was filed on May 28, 1982.8 The facts as alleged wereadmitted but not the allegations which to their mind are "mere arguments, opinions orconclusions on the part of the petitioner, the truth [for them] being those stated [in their]Special and Affirmative Defenses." 9 The answer then affirmed: "Batas Pambansa Big.135 is a valid exercise of the State's power to tax. The authorities and cases citedwhile correctly quoted or paraghraph do not support petitioner's stand." 10 The prayeris for the dismissal of the petition for lack of merit.

This Court finds such a plea more than justified. The petition must be dismissed.

1. It is manifest that the field of state activity has assumed a much wider scope, Thereason was so clearly set forth by retired Chief Justice Makalintal thus: "The areaswhich used to be left to private enterprise and initiative and which the government wascalled upon to enter optionally, and only 'because it was better equipped to administerfor the public welfare than is any private individual or group of individuals,' continue tolose their well-defined boundaries and to be absorbed within activities that thegovernment must undertake in its sovereign capacity if it is to meet the increasingsocial challenges of the times." 11 Hence the need for more revenues. The power totax, an inherent prerogative, has to be availed of to assure the performance of vitalstate functions. It is the source of the bulk of public funds. To praphrase a recentdecision, taxes being the lifeblood of the government, their prompt and certainavailability is of the essence. 12

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute ofsovereignty. It is the strongest of all the powers of of government." 13 It is, of course, tobe admitted that for all its plenitude 'the power to tax is not unconfined. There are

restrictions. The Constitution sets forth such limits . Adversely affecting as it doesproperly rights, both the due process and equal protection clauses inay properly beinvoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if itwere otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that"the power to tax involves the power to destroy." 14 In a separate opinion in Graves v.New York , 15 Justice Frankfurter, after referring to it as an 1, unfortunate remarkcharacterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of thetimes following] a free use of absolutes." 16 This is merely to emphasize that it is riotand there cannot be such a constitutional mandate. Justice Frankfurter could rightfullyconclude: "The web of unreality spun from Marshall's famous dictum was brushedaway by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power todestroy while this Court sits." 17 So it is in the Philippines.

3. This Court then is left with no choice. The Constitution as the fundamental lawoverrides any legislative or executive, act that runs counter to it. In any case thereforewhere it can be demonstrated that the challenged statutory provision — as petitionerhere alleges — fails to abide by its command, then this Court must so declare andadjudge it null. The injury thus is centered on the question of whether the imposition of



a higher tax rate on taxable net income derived from business or profession than oncompensation is constitutionally infirm.

4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. Amere allegation, as here. does not suffice. There must be a factual foundation of suchunconstitutional taint. Considering that petitioner here would condemn such a provisionas void or its face, he has not made out a case. This is merely to adhere to the

authoritative doctrine that were the due process and equal protection clauses areinvoked, considering that they arc not fixed rules but rather broad standards, there is aneed for of such persuasive character as would lead to such a conclusion. Absent sucha showing, the presumption of validity must prevail. 18

5. It is undoubted that the due process clause may be invoked where a taxing statute isso arbitrary that it finds no support in the Constitution. An obvious example is where itcan be shown to amount to the confiscation of property. That would be a clear abuse ofpower. It then becomes the duty of this Court to say that such an arbitrary actamounted to the exercise of an authority not conferred. That properly calls for theapplication of the Holmes dictum. It has also been held that where the assailed taxmeasure is beyond the jurisdiction of the state, or is not for a public purpose, or, incase of a retroactive statute is so harsh and unreasonable, it is subject to attack ondue process grounds. 19

6. Now for equal protection. The applicable standard to avoid the charge that there is adenial of this constitutional mandate whether the assailed act is in the exercise of thelice power or the power of eminent domain is to demonstrated that the governmentalact assailed, far from being inspired by the attainment of the common weal was

prompted by the spirit of hostility, or at the very least, discrimination that finds nosupport in reason. It suffices then that the laws operate equally and uniformly on allpersons under similar circumstances or that all persons must be treated in the samemanner, the conditions not being different, both in the privileges conferred and theliabilities imposed. Favoritism and undue preference cannot be allowed. For theprinciple is that equal protection and security shall be given to every person undercircumtances which if not Identical are analogous. If law be looked upon in terms ofburden or charges, those that fall within a class should be treated in the same fashion,whatever restrictions cast on some in the group equally binding on the rest." 20 Thatsame formulation applies as well to taxation measures. The equal protection clause is,of course, inspired by the noble concept of approximating the Ideal of the laws benefitsbeing available to all and the affairs of men being governed by that serene andimpartial uniformity, which is of the very essence of the Idea of law. There is, however,wisdom, as well as realism in these words of Justice Frankfurter: "The equality at whichthe 'equal protection' clause aims is not a disembodied equality. The FourteenthAmendment enjoins 'the equal protection of the laws,' and laws are not abstractpropositions. They do not relate to abstract units A, B and C, but are expressions ofpolicy arising out of specific difficulties, address to the attainment of specific ends bythe use of specific remedies. The Constitution does not require things which are



different in fact or opinion to be treated in law as though they were the same." 21Hencethe constant reiteration of the view that classification if rational in character isallowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court,through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in thepower to tax that a state be free to select the subjects of taxation, and it has beenrepeatedly held that 'inequalities which result from a singling out of one particular classfor taxation, or exemption infringe no constitutional limitation.'" 23

7. Petitioner likewise invoked the kindred concept of uniformity. According to theConstitution: "The rule of taxation shag be uniform and equitable." 24 This requirementis met according to Justice Laurel in Philippine Trust Company v. Yatco, 25 decided in1940, when the tax "operates with the same force and effect in every place where thesubject may be found. " 26 He likewise added: "The rule of uniformity does not call forperfect uniformity or perfect equality, because this is hardly attainable." 27 The problemof classification did not present itself in that case. It did not arise until nine years later,when the Supreme Court held: "Equality and uniformity in taxation means that all

taxable articles or kinds of property of the same class shall be taxed at the same rate.The taxing power has the authority to make reasonable and natural classifications forpurposes of taxation, ... . 28 As clarified by Justice Tuason, where "the differentiation"complained of "conforms to the practical dictates of justice and equity" it "is notdiscriminatory within the meaning of this clause and is therefore uniform." 29 There isquite a similarity then to the standard of equal protection for all that is required is thatthe tax "applies equally to all persons, firms and corporations placed in similarsituation." 30

8. Further on this point. Apparently, what misled petitioner is his failure to take into

consideration the distinction between a tax rate and a tax base. There is no legalobjection to a broader tax base or taxable income by eliminating all deductible itemsand at the same time reducing the applicable tax rate. Taxpayers may be classifiedinto different categories. To repeat, it. is enough that the classification must rest uponsubstantial distinctions that make real differences. In the case of the gross incometaxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classificationis the susceptibility of the income to the application of generalized rules removing alldeductible items for all taxpayers within the class and fixing a set of reduced tax ratesto be applied to all of them. Taxpayers who are recipients of compensation income are

set apart as a class. As there is practically no overhead expense, these taxpayers aree not entitled to make deductions for income tax purposes because they are in thesame situation more or less. On the other hand, in the case of professionals in thepractice of their calling and businessmen, there is no uniformity in the costs orexpenses necessary to produce their income. It would not be just then to disregard thedisparities by giving all of them zero deduction and indiscriminately impose on all alikethe same tax rates on the basis of gross income. There is ample justification then forthe Batasang Pambansa to adopt the gross system of income taxation to



compensation income, while continuing the system of net income taxation as regardsprofessional and business income.

9. Nothing can be clearer, therefore, than that the petition is without merit, consideringthe (1) lack of factual foundation to show the arbitrary character of the assailedprovision; 31 (2) the force of controlling doctrines on due process, equal protection, anduniformity in taxation and (3) the reasonableness of the distinction between

compensation and taxable net income of professionals and businessman certainly nota suspect classification,

WHEREFORE, the petition is dismissed. Costs against petitioner.

Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr.,De la Fuente and Cuevas, JJ., concur.

Teehankee, J., concurs in the result.

Plana, J., took no part.

Separate Opinions




This is a frivolous suit. While the tax rates for compensation income are lower thanthose for net income such circumtance does not necessarily result in lowertax payments for these receiving compensation income. In fact, the reverse will mostlikely be the case; those who file returns on the basis of net income will pay less taxes

because they claim all sort of deduction justified or not I vote for dismissal.

Separate Opinions






This is a frivolous suit. While the tax rates for compensation income are lower thanthose for net income such circumtance does not necessarily result in lowertax payments for these receiving compensation income. In fact, the reverse will most

likely be the case; those who file returns on the basis of net income will pay less taxesbecause they claim all sort of deduction justified or not I vote for dismissal.

PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiff-appellant,vs.CITY OF BUTUAN, MEMBERS OF THE MUNICIPAL BOARD,THE CITY MAYOR and THE CITY TREASURER, all of the CITY OFBUTUAN, defendants-appellees.

Sabido, Sabido and Associates for plaintiff-appellant.

The City Attorney of Butuan City for defendants-appellees.

CONCEPCION, C.J.:

Direct appeal to this Court, from a decision of the Court of First Instance of Agusan,dismissing plaintiff's complaint, with costs.

Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation withoffices and principal place of business in Quezon City. The defendants are the City ofButuan, its City Mayor, the members of its municipal board and its City Treasurer.Plaintiff — seeks to recover the sums paid by it to the City of Butuan — hereinafterreferred to as the City and collected by the latter, pursuant to its Municipal OrdinanceNo. 110, as amended by Municipal Ordinance No. 122, both series of 1960, whichplaintiff assails as null and void, and to prevent the enforcement thereof. Both partiessubmitted the case for decision in the lower court upon a stipulation to the effect:

1. That plaintiff's warehouse in the City of Butuan serves as a storage for itsproducts the "Pepsi-Cola" soft drinks for sale to customers in the City of Butuanand all the municipalities in the Province of Agusan. These "Pepsi-Cola Cola"

soft drinks are bottled in Cebu City and shipped to the Butuan City warehouse ofplaintiff for distribution and sale in the City of Butuan and all municipalities ofAgusan. .

2. That on August 16, 1960, the City of Butuan enacted Ordinance No. 110 whichwas subsequently amended by Ordinance No. 122 and effective November 28,1960. A copy of Ordinance No. 110, Series of 1960 and Ordinance No. 122 areincorporated herein as Exhibits "A" and "B", respectively.



3. That Ordinance No. 110 as amended, imposes a tax on any person,association, etc., of P0.10 per case of 24 bottles of Pepsi-Cola and the plaintiffpaid under protest the amount of P4,926.63 from August 16 to December 31,1960 and the amount of P9,250.40 from January 1 to July 30, 1961.

4. That the plaintiff filed the foregoing complaint for the recovery of the totalamount of P14,177.03 paid under protest and those that if may later on pay until

the termination of this case on the ground that Ordinance No. 110 as amended ofthe City of Butuan is illegal, that the tax imposed is excessive and that it isunconstitutional.

5. That pursuant to Ordinance No. 110 as amended, the City Treasurer of ButuanCity, has prepared a form to be accomplished by the plaintiff for the computationof the tax. A copy of the form is enclosed herewith as Exhibit "C".

6. That the Profit and Loss Statement of the plaintiff for the period from January1, 1961 to July 30, 1961 of its warehouse in Butuan City is incorporated herein asExhibits "D" to "D-1" to "D-5". In this Profit and Loss Statement, the defendantsclaim that the plaintiff is not entitled to a depreciation of P3,052.63 but onlyP1,202.55 in which case the profit of plaintiff will be increased from P1,254.44 toP3,104.52. The plaintiff differs only on the claim of depreciation which thecompany claims to be P3,052.62. This is in accordance with the findings of therepresentative of the undersigned City Attorney who verified the records of theplaintiff.

7. That beginning November 21, 1960, the price of Pepsi-Cola per case of 24

bottles was increased to P1.92 which price is uniform throughout the Philippines.Said increase was made due to the increase in the production cost of itsmanufacture.

8. That the parties reserve the right to submit arguments on the constitutionalityand illegality of Ordinance No. 110, as amended of the City of Butuan in theirrespective memoranda.

x x x x x x x x x1äwphï1.ñët

Section 1 of said Ordinance No. 110, as amended, states what products are "liquors",within the purview thereof. Section 2 provides for the payment by "any agent and/orconsignee" of any dealer "engaged in selling liquors, imported or local, in the City," oftaxes at specified rates. Section 3 prescribes a tax of P0.10 per case of 24 bottles ofthe soft drinks and carbonated beverages therein named, and "all other soft drinks orcarbonated drinks." Section 3-A, defines the meaning of the term "consignee or agent"for purposes of the ordinance. Section 4 provides that said taxes "shall be paid at theend of every calendar month." Pursuant to Section 5, the taxes "shall be based andcomputed from the cargo manifest or bill of lading or any other record showing the



number of cases of soft drinks, liquors or all other soft drinks or carbonated drinksreceived within the month." Sections 6, 7 and 8 specify the surcharge to be added forfailure to pay the taxes within the period prescribed and the penalties imposable for"deliberate and willful refusal to pay the tax mentioned in Sections 2 and 3" or forfailure "to furnish the office of the City Treasurer a copy of the bill of lading or cargomanifest or record of soft drinks, liquors or carbonated drinks for sale in the City."Section 9 makes the ordinance applicable to soft drinks, liquors or carbonated drinks

"received outside" but "sold within" the City. Section 10 of the ordinance provides thatthe revenue derived therefrom "shall be alloted as follows: 40% for Roads and BridgesFund; 40% for the General Fund and 20% for the School Fund."

Plaintiff maintains that the disputed ordinance is null and void because: (1) it partakesof the nature of an import tax; (2) it amounts to double taxation; (3) it is excessive,oppressive and confiscatory; (4) it is highly unjust and discriminatory; and (5) section 2of Republic Act No. 2264, upon the authority of which it was enacted, is anunconstitutional delegation of legislative powers.

The second and last objections are manifestly devoid of merit. Indeed — independentlyof whether or not the tax in question, when considered in relation to the sales taxprescribed by Acts of Congress, amounts to double taxation, on which we need notand do not express any opinion - double taxation, in general, is not forbidden by ourfundamental law. We have not adopted, as part thereof, the injunction against doubletaxation found in the Constitution of the United States and of some States of theUnion.1 Then, again, the general principle against delegation of legislative powers, inconsequence of the theory of separation of powers2 is subject to one well-establishedexception, namely: legislative powers may be delegated to local governments — to

which said theory does not apply3 — in respect of matters of local concern.

The third objection is, likewise, untenable. The tax of "P0.10 per case of 24 bottles," ofsoft drinks or carbonated drinks — in the production and sale of which plaintiff isengaged — or less than P0.0042 per bottle, is manifestly too small to be excessive,oppressive, or confiscatory.

The first and the fourth objections merit, however, serious consideration. In thisconnection, it is noteworthy that the tax prescribed in section 3 of Ordinance No. 110,as originally approved, was imposed upon dealers "engaged in selling" soft drinks or

carbonated drinks. Thus, it would seem that the intent was then to levy a tax upon thesale of said merchandise. As amended by Ordinance No. 122, the tax is, however,imposed only upon "any agent and/or consignee of any person, association,partnership, company or corporation engaged in selling ... soft drinks or carbonateddrinks." And, pursuant to section 3-A, which was inserted by said Ordinance No. 122:

... — Definition of the Term Consignee or Agent. — For purposes of thisOrdinance, a consignee of agent shall mean any person, association,partnership, company or corporation who acts in the place of another by authority



from him or one entrusted with the business of another or to whom is consignedor shipped no less than 1,000 cases of hard liquors or soft drinks every monthfor resale , either retail or wholesale.

As a consequence, merchants engaged in the sale of soft drink or carbonated drinks,are not subject to the tax,unless they are agents and/or consignees of another dealer, who, in the very nature of things, must be one engaged in business outside the

City. Besides, the tax would not be applicable to such agent and/or consignee, if lessthan 1,000 cases of soft drinks are consigned or shipped to him every month. Whenwe consider, also, that the tax "shall be based and computed from the cargo manifest or bill of lading ... showing the number of cases" — not sold — but "received "by the taxpayer, the intention to limit the application of the ordinance to soft drinks andcarbonated drinks brought into the City from outside thereof becomes apparent.Viewed from this angle, the tax partakes of the nature of an import duty, which isbeyond defendant's authority to impose by express provision of law.4

Even however, if the burden in question were regarded as a tax on the sale of saidbeverages, it would still be invalid, as discriminatory, and hence, violative of theuniformity required by the Constitution and the law therefor, since only sales by "agentsor consignees" of outside dealers would be subject to the tax. Sales by local dealers,not acting for or on behalf of other merchants, regardless of the volume of their sales,and even if the same exceeded those made by said agents or consignees of producersor merchants established outside the City of Butuan, would be exempt from thedisputed tax.

It is true that the uniformity essential to the valid exercise of the power of taxation does

not require identity or equality under all circumstances, or negate the authority toclassify the objects of taxation.5 The classification made in the exercise of thisauthority, to be valid, must, however, be reasonable6 and this requirement is notdeemed satisfied unless: (1) it is based upon substantial distinctions which make realdifferences; (2) these are germane to the purpose of the legislation or ordinance; (3)the classification applies, not only to present conditions, but, also, to future conditionssubstantially identical to those of the present; and (4) the classification applies equallyall those who belong to the same class.7

These conditions are not fully met by the ordinance in question.8 Indeed, if its purpose

were merely to levy a burden upon the sale of soft drinks or carbonated beverages,there is no reason why sales thereof by sealers other than agents or consignees ofproducers or merchants established outside the City of Butuan should be exempt fromthe tax.

WHEREFORE, the decision appealed from is hereby reversed, and another one shallbe entered annulling Ordinance No. 110, as amended by Ordinance No. 122, andsentencing the City of Butuan to refund to plaintiff herein the amounts collected fromand paid under protest by the latter, with interest thereon at the legal rate from the date



of the promulgation of this decision, in addition to the costs, and defendants herein are,accordingly, restrained and prohibited permanently from enforcing said Ordinance, asamended. It is so ordered.

Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando,JJ., concur. 1äwphï1.ñët

ORMOC SUGAR COMPANY, INC., plaintiff-appellant,vs.THE TREASURER OF ORMOC CITY, THE MUNICIPAL BOARD OF ORMOC CITY,HON. ESTEBAN C. CONEJOS as Mayor of Ormoc City and ORMOCCITY, defendants-appellees.

Ponce Enrile, Siguion Reyna, Montecillo & Belo and Teehankee, Carreon & Tañada forplaintiff-appellant.Ramon O. de Veyra for defendants-appellees.

BENGZON, J.P., J.:

On January 29, 1964, the Municipal Board of Ormoc City passed 1 OrdinanceNo. 4, Series of 1964, imposing "on any and all productions of centrifugal sugarmilled at the Ormoc Sugar Company, Inc ., in Ormoc City a municipal tax equivalent toone per centum (1%) per export sale to the United States of America and other foreigncountries." 2

Payments for said tax were made, under protest, by Ormoc Sugar Company,Inc. on March 20, 1964 for P7,087.50 and on April 20, 1964 for P5,000, or a total ofP12,087.50.

On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of FirstInstance of Leyte, with service of a copy upon the Solicitor General, acomplaint 3 against the City of Ormoc as well as its Treasurer, Municipal Board andMayor, alleging that the afore-stated ordinance is unconstitutional for being violative ofthe equal protection clause (Sec. 1[1], Art. III, Constitution) and the rule of uniformity oftaxation (Sec. 22[1]), Art. VI, Constitution), aside from being an export tax forbiddenunder Section 2287 of the Revised Administrative Code. It further alleged that the tax

is neither a production nor a license tax which Ormoc City under Section 15-kk of itscharter and under Section 2 of Republic Act 2264, otherwise known as the LocalAutonomy Act, is authorized to impose; and that the tax amounts to a customs duty,fee or charge in violation of paragraph 1 of Section 2 of Republic Act 2264 because thetax is on both the sale and export of sugar.

Answering, the defendants asserted that the tax ordinance was within defendantcity's power to enact under the Local Autonomy Act and that the same did not violatethe afore-cited constitutional limitations. After pre-trial and submission of the case on



memoranda, the Court of First Instance, on August 6, 1964, rendered a decision thatupheld the constitutionality of the ordinance and declared the taxing power ofdefendant chartered city broadened by the Local Autonomy Act to include all otherforms of taxes, licenses or fees not excluded in its charter.

Appeal therefrom was directly taken to Us by plaintiff Ormoc Sugar Company,Inc. Appellant alleges the same statutory and constitutional violations in the aforesaid

taxing ordinance mentioned earlier.

Section 1 of the ordinance states: "There shall be paid to the City Treasurer onany and all productions of centrifugal sugar milled at the Ormoc Sugar Company,Incorporated, in Ormoc City, a municipal tax equivalent to one per centum (1%) perexport sale to the United States of America and other foreign countries." Thoughreferred to as a tax on the export of centrifugal sugar produced at Ormoc SugarCompany, Inc. For production of sugar alone is not taxable; the only time the taxapplies is when the sugar produced is exported.

Appellant questions the authority of the defendant Municipal Board to levy suchan export tax, in view of Section 2287 of the Revised Administrative Code whichdenies from municipal councils the power to impose an export tax. Section 2287 in partstates: "It shall not be in the power of the municipal council to impose a tax in any formwhatever, upon goods and merchandise carried into the municipality, or out of thesame, and any attempt to impose an import or export tax upon such goods in the guiseof an unreasonable charge for wharfage use of bridges or otherwise, shall be void."

Subsequently, however, Section 2 of Republic Act 2264 effective June 19, 1959,

gave chartered cities, municipalities and municipal districts authority to levy for publicpurposes just and uniform taxes, licenses or fees. Anent the inconsistency betweenSection 2287 of the Revised Administrative Code and Section 2 of Republic Act 2264,this Court, in Nin Bay Mining Co. v. Municipality of Roxas 4 held the former to havebeen repealed by the latter. And expressing Our awareness of the transcendentaleffects that municipal export or import taxes or licenses will have on the nationaleconomy, due to Section 2 of Republic Act 2264, We stated that there was no otheralternative until Congress acts to provide remedial measures to forestall anyunfavorable results.

The point remains to be determined, however, whether constitutional limits onthe power of taxation, specifically the equal protection clause and rule of uniformity oftaxation, were infringed.

The Constitution in the bill of rights provides: ". . . nor shall any person be deniedthe equal protection of the laws." (Sec. 1 [1], Art. III) In Felwa vs. Salas , 5 We ruled thatthe equal protection clause applies only to persons or things identically situated anddoes not bar a reasonable classification of the subject of legislation, and aclassification is reasonable where (1) it is based on substantial distinctions which make



real differences; (2) these are germane to the purpose of the law; (3) the classificationapplies not only to present conditions but also to future conditions which aresubstantially identical to those of the present; (4) the classification applies only to thosewho belong to the same class.

A perusal of the requisites instantly shows that the questioned ordinance doesnot meet them, for it taxes only centrifugal sugar produced and exported by the Ormoc

Sugar Company, Inc. and none other. At the time of the taxing ordinance's enactment,Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc.Still, the classification, to be reasonable, should be in terms applicable to futureconditions as well. The taxing ordinance should not be singular and exclusive as toexclude any subsequently established sugar central, of the same class as plaintiff, forthe coverage of the tax. As it is now, even if later a similar company is set up, it cannotbe subject to the tax because the ordinance expressly points only to Ormoc City SugarCompany, Inc. as the entity to be levied upon.

Appellant, however, is not entitled to interest; on the refund because the taxeswere not arbitrarily collected (Collector of Internal Revenue v. Binalbagan). 6 At the timeof collection, the ordinance provided a sufficient basis to preclude arbitrariness, thesame being then presumed constitutional until declared otherwise.

WHEREFORE, the decision appealed from is hereby reversed, the challengedordinance is declared unconstitutional and the defendants-appellees are herebyordered to refund the P12,087.50 plaintiff-appellant paid under protest. No costs. Soordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angelesand Fernando, JJ., concur.1äwphï1.ñët

CAGAYAN ELECTRIC POWER & LIGHT CO., INC., petitioner,vs.COMMISSIONER OF INTERNAL REVENUE and COURT OFAPPEALS, respondents.

Quasha, De Guzman Makalintal & Barot for petitioner.

AQUINO, J.: This is about the liability of petitioner Cagayan Electric Power & Light Co., Inc. forincome tax amounting to P75,149.73 for the more than seven-month period of the year1969 in addition to franchise tax.

The petitioner is the holder of a legislative franchise, Republic Act No. 3247, underwhich its payment of 3% tax on its gross earnings from the sale of electric current is "inlieu of all taxes and assessments of whatever authority upon privileges, earnings,



income, franchise, and poles, wires, transformers, and insulators of the grantee, fromwhich taxes and assessments the grantee is hereby expressly exempted" (Sec. 3).

On June 27, 1968, Republic Act No. 5431 amended section 24 of the Tax Code bymaking liable for income tax all corporate taxpayers not specifically exempt underparagraph (c) (1) of said section and section 27 of the Tax Code notwithstanding the"provisions of existing special or general laws to the contrary". Thus, franchise

companies were subjected to income tax in addition to franchise tax.

However, in petitioner's case, its franchise was amended by Republic Act No. 6020,effective August 4, 1969, by authorizing the petitioner to furnish electricity to themunicipalities of Villanueva and Jasaan, Misamis Oriental in addition to Cagayan deOro City and the municipalities of Tagoloan and Opol. The amendment reenacted thetax exemption in its original charter or neutralized the modification made by RepublicAct No. 5431 more than a year before.

By reason of the amendment to section 24 of the Tax Code, the Commissioner ofInternal Revenue in a demand letter dated February 15, 1973 required the petitioner topay deficiency income taxes for 1968-to 1971. The petitioner contested theassessments. The Commissioner cancelled the assessments for 1970 and 1971 butinsisted on those for 1968 and 1969.

The petitioner filed a petition for review with the Tax Court, which on February 26, 1982held the petitioner liable only for the income tax for the period from January 1 to August3, 1969 or before the passage of Republic Act No. 6020 which reiterated its taxexemption. The petitioner appealed to this Court.

It contends that the Tax Court erred (1) in not holding that the franchise tax paid by thepetitioner is a commutative tax which already includes the income tax; (2) in holdingthat Republic Act No. 5431 as amended, altered or repealed petitioner's franchise; (3)in holding that petitioner's franchise is a contract which can be impaired by an impliedrepeal and (4) in not holding that section 24(d) of the Tax Code should be construedstrictly against the Government.

We hold that Congress could impair petitioner's legislative franchise by making it liablefor income tax from which heretofore it was exempted by virtue of the exemption

provided for in section 3 of its franchise.

The Constitution provides that a franchise is subject to amendment, alteration or repealby the Congress when the public interest so requires (Sec. 8, Art. XIV, 1935Constitution; Sec. 5, Art. XIV, 1973 Constitution),

Section 1 of petitioner's franchise, Republic Act No. 3247, provides that it is subject tothe provisions of the Constitution and to the terms and conditions established in Act



No. 3636 whose section 12 provides that the franchise is subject to amendment,alteration or repeal by Congress.

Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting toincome tax all corporate taxpayers not expressly exempted therein and in section 27 ofthe Code, had the effect of withdrawing petitioner's exemption from income tax.

The Tax Court acted correctly in holding that the exemption was restored by thesubsequent enactment on August 4, 1969 of Republic Act No. 6020 which reenactedthe said tax exemption. Hence, the petitioner is liable only for the income tax for theperiod from January 1 to August 3, 1969 when its tax exemption was modified byRepublic Act No. 5431.

It is relevant to note that franchise companies, like the Philippine Long DistanceTelephone Company, have been paying income tax in addition to the franchise tax.

However, it cannot be denied that the said 1969 assessment appears to be highly

controversial. The Commissioner at the outset was not certain as to petitioner's incometax liability. It had reason not to pay income tax because of the tax exemption in itsfranchise.

For this reason, it should be liable only for tax proper and should not be held liable forthe surcharge and interest. (Advertising Associates, Inc. vs. Commissioner of InternalRevenue and Court of Tax Appeals, G. R. No. 59758, December 26, 1984,133 SCRA765; Imus Electric Co., Inc. vs. Commissioner of Internal Revenue, 125 Phil. 1024;C.M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue, L-28383, June 22,

1976, 71 SCRA 511.)

WHEREFORE, the judgment of the Tax Court is affirmed with the modification that thepetitioner is liable only for the tax proper and that it should not pay the delinquencypenalties. No costs.

SO ORDERED.

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.

LINGAYEN GULF ELECTRIC POWER CO., INC. and THE COURT OF TAXAPPEALS, respondents.

Angel Sanchez for Lingayen Electric Power Co., Inc.

SARMIENTO, J.:



This is an appeal from the decision * of the Court of Tax Appeals (C.T.A., for brevity)dated September 15, 1964 in C.T.A. Cases Nos. 581 and 1302, which were jointlyheard upon agreement of the parties, absolving the respondent taxpayer from liabilityfor the deficiency percentage, franchise, and fixed taxes and surcharge assessedagainst it in the sums of P19,293.41 and P3,616.86 for the years 1946 to 1954 and1959 to 1961, respectively.

The respondent taxpayer, Lingayen Gulf Electric Power Co., Inc., operates an electricpower plant serving the adjoining municipalities of Lingayen and Binmaley, both in theprovince of Pangasinan, pursuant to the municipal franchise granted it by theirrespective municipal councils, under Resolution Nos. 14 and 25 of June 29 and July 2,1946, respectively. Section 10 of these franchises provide that:

...The said grantee in consideration of the franchise hereby granted, shall pay quarterlyinto the Provincial Treasury of Pangasinan, one per centum of the gross earningsobtained thru this privilege during the first twenty years and two per centum during theremaining fifteen years of the life of said franchise.

On February 24, 1948, the President of the Philippines approved the franchisesgranted to the private respondent.

On November 21, 1955, the Bureau of Internal Revenue (BIR) assessed against anddemanded from the private respondent the total amount of P19,293.41 representingdeficiency franchise taxes and surcharges for the years 1946 to 1954 applying thefranchise tax rate of 5% on gross receipts from March 1, 1948 to December 31, 1954as prescribed in Section 259 of the National Internal Revenue Code, instead of the

lower rates as provided in the municipal franchises. On September 29, 1956, theprivate respondent requested for a reinvestigation of the case on the ground thatinstead of incurring a deficiency liability, it made an overpayment of the franchise tax.On April 30, 1957, the BIR through its regional director, denied the private respondent'srequest for reinvestigation and reiterated the demand for payment of the same. In itsletters dated July 2, and August 9, 1958 to the petitioner Commissioner, the privaterespondent protested the said assessment and requested for a conference with a viewto settling the liability amicably. In his letters dated July 25 and August 28, 1958, theCommissioner denied the request of the private respondent. Thus, the appeal to therespondent Court of Tax Appeals on September 19, 1958, docketed as C.T.A. Case

No. 581.

In a letter dated August 21, 1962, the Commissioner demanded from the privaterespondent the payment of P3,616.86 representing deficiency franchise tax andsurcharges for the years 1959 to 1961 again applying the franchise tax rate of 5% ongross receipts as prescribed in Section 259 of the National Internal Revenue Code. Ina letter dated October 5, 1962, the private respondent protested the assessment andrequested reconsideration thereof The same was denied on November 9, 1962. Thus,



the appeal to the respondent Court of Appeals on November 29, 1962, docketed asC.T.A. No. 1302.

Pending the hearing of the said cases, Republic Act (R.A.) No. 3843 was passed onJune 22, 1 963, granting to the private respondent a legislative franchise for theoperation of the electric light, heat, and power system in the same municipalities ofPangasinan. Section 4 thereof provides that:

In consideration of the franchise and rights hereby granted, the grantee shall pay intothe Internal Revenue office of each Municipality in which it is supplying electric currentto the public under this franchise, a tax equal to two per centum of the gross receiptsfrom electric current sold or supplied under this franchise. Said tax shall be due andpayable quarterly and shall be in lieu of any and all taxes and/or licenses of any kind,nature or description levied, established, or collected by any authority whatsoever,municipal, provincial or national, now or in the future, on its poles, wires, insulator ...and on its franchise, rights, privileges, receipts, revenues and profits, from which taxesand/or licenses, the grantee is hereby expressly exempted and effective further uponthe date the original franchise was granted, no other tax and/or licenses other than thefranchise tax of two per centum on the gross receipts as provided for in the originalfranchise shall be collected, any provision of law to the contrary notwithstanding.

On September 15, 1964, the respondent court ruled that the provisions of R.A. No.3843 should apply and accordingly dismissed the claim of the Commissioner ofInternal Revenue. The said ruling is now the subject of the petition at bar.

The issues raised for resolution are:

1. Whether or not the 5% franchise tax prescribed in Section 259 of the NationalInternal Revenue Code assessed against the private respondent on its gross receiptsrealized before the effectivity of R.A- No. 3843 is collectible.

2. Whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative ofthe "uniformity and equality of taxation" clause of the Constitution.

3. If the abovementioned Section 4 of R.A. No. 3843 is valid, whether or not it could begiven retroactive effect so as to render uncollectible the taxes in question which were

assessed before its enactment.

4. Whether or not the respondent taxpayer is liable for the fixed and deficiencypercentage taxes in the amount of P3,025.96 for the period from January 1, 1946 toFebruary 29, 1948, the period before the approval of its municipal franchises.

The first issue raised by the petitioner before us is whether or not the five percent (5%)franchise tax prescribed in Section 259 of the National Internal Revenue Code(Commonwealth Act No. 466 as amended by R.A. No. 39) assessed against the



private respondent on its gross receipts realized before the effectivity of R.A- No. 3843is collectible. It is the contention of the petitioner Commissioner of Internal Revenuethat the private respondent should have been held liable for the 5% franchise tax ongross receipts prescribed in Section 259 of the Tax Code, instead of the lowerfranchise tax rates provided in the municipal franchises (1% of gross earnings for thefirst twenty years and 2% for the remaining fifteen years of the life of the franchises)because Section 259 of the Tax Code, as amended by RA No. 39 of October 1, 1946,

applied to existing and future franchises. The franchises of the private respondent werealready in existence at the time of the adoption of the said amendment, since thefranchises were accepted on March 1, 1948 after approval by the President of thePhilippines on February 24, 1948. The private respondent's original franchises did notcontain the proviso that the tax provided therein "shall be in lieu of all taxes;" moreover,the franchises contained a reservation clause that they shag be subject to amendment,alteration, or repeal, but even in the absence of such cause, the power of theLegislature to alter, amend, or repeal any franchise is always deemed reserved. Thefranchise of the private respondent have been modified or amended by Section 259 of

the Tax Code, the petitioner submits.

We find no merit in petitioner's contention. R.A. No. 3843 granted the privaterespondent a legislative franchise in June, 1963, amending, altering, or even repealingthe original municipal franchises, and providing that the private respondent should payonly a 2% franchise tax on its gross receipts, "in lieu of any and all taxes and/orlicenses of any kind, nature or description levied, established, or collected by anyauthority whatsoever, municipal, provincial, or national, now or in the future ...and effective further upon the date the original franchise was granted, no other taxand/or licenses other than the franchise tax of two per centum on the gross receipts ...

shall be collected, any provision of law to the contrary notwithstanding." Thus, by virtueof R.A- No. 3843, the private respondent was liable to pay only the 2% franchise tax,effective from the date the original municipal franchise was granted.

On the question as to whether or not Section 4 of R.A. No. 3843 is unconstitutional forbeing violative of the "uniformity and equality of taxation" clause of the Constitution,and, if adjudged valid, whether or not it should be given retroactive effect, the petitionersubmits that the said law is unconstitutional insofar as it provides for the payment bythe private respondent of a franchise tax of 2% of its gross receipts, while other

taxpayers similarly situated were subject to the 5% franchise tax imposed in Section259 of the Tax Code, thereby discriminatory and violative of the rule on uniformity andequality of taxation.

A tax is uniform when it operates with the same force and effect in every place wherethe subject of it is found. Uniformity means that all property belonging to the sameclass shall be taxed alike The Legislature has the inherent power not only to select thesubjects of taxation but to grant exemptions. Tax exemptions have never been deemedviolative of the equal protection clause. 1 It is true that the private respondentsmunicipal franchises were obtained under Act No. 667 2 of the Philippine Commission,



but these original franchises have been replaced by a new legislative franchise, i.e.R.A. No. 3843. As correctly held by the respondent court, the latter was grantedsubject to the terms and conditions established in Act No. 3636, 3 as amended by C.A.No. 132. These conditions Identify the private respondent's power plant as falling withinthat class of power plants created by Act No. 3636, as amended. The benefits of thetax reduction provided by law (Act No. 3636 as amended by C.A. No. 132 and R.A. No.3843) apply to the respondent's power plant and others circumscribed within this class.

R.A-No. 3843 merely transferred the petitioner's power plant from that class providedfor in Act No. 667, as amended, to which it belonged until the approval of R.A- No.3843, and placed it within the class falling under Act No. 3636, as amended. Thus, itonly effected the transfer of a taxable property from one class to another.

We do not have the authority to inquire into the wisdom of such act. Furthermore, the5% franchise tax rate provided in Section 259 of the Tax Code was never intended tohave a universal application. 4 We note that the said Section 259 of the Tax Codeexpressly allows the payment of taxes at rates lower than 5% when the charter

granting the franchise of a grantee, like the one granted to the private respondentunder Section 4 of R.A. No. 3843, precludes the imposition of a higher tax. R.A. No.3843 did not only fix and specify a franchise tax of 2% on its gross receipts, but made it"in lieu of any and all taxes, all laws to the contrary notwithstanding," thus, leaving noroom for doubt regarding the legislative intent. "Charters or special laws granted andenacted by the Legislature are in the nature of private contracts. They do not constitutea part of the machinery of the general government. They are usually adopted aftercareful consideration of the private rights in relation with resultant benefits to the State... in passing a special charter the attention of the Legislature is directed to the factsand circumstances which the act or charter is intended to meet. The Legislature

consider (sic) and make (sic) provision for all the circumstances of a particularcase." 5 In view of the foregoing, we find no reason to disturb the respondent court'sruling upholding the constitutionality of the law in question.

Given its validity, should the said law be applied retroactively so as to renderuncollectible the taxes in question which were assessed before its enactment? Thequestion of whether a statute operates retrospectively or only prospectively dependson the legislative intent. In the instant case, Act No. 3843 provides that "effective ...upon the date the original franchise was granted, no other tax and/or licenses other

than the franchise tax of two per centum on the gross receipts ... shall be collected,any provision to the contrary notwithstanding." Republic Act No. 3843 thereforespecifically provided for the retroactive effect of the law.

The last issue to be resolved is whether or not the private respondent is liable for thefixed and deficiency percentage taxes in the amount of P3,025.96 (i.e. for the periodfrom January 1, 1946 to February 29, 1948) before the approval of its municipalfranchises. As aforestated, the franchises were approved by the President only onFebruary 24, 1948. Therefore, before the said date, the private respondent was liablefor the payment of percentage and fixed taxes as seller of light, heat, and power —



which as the petitioner claims, amounted to P3,025.96. The legislative franchise (R.A.No. 3843) exempted the grantee from all kinds of taxes other than the 2% tax from the date the original franchise was granted . The exemption, therefore, did not cover theperiod before the franchise was granted, i.e. before February 24, 1948. However, aspointed out by the respondent court in its findings, during the period covered by theinstant case, that is from January 1, 1946 to December 31, 1961, the privaterespondent paid the amount of P34,184.36, which was very much more than the

amount rightfully due from it. Hence, the private respondent should no longer be madeto pay for the deficiency tax in the amount of P3,025.98 for the period from January 1,1946 to February 29, 1948.

WHEREFORE, the appealed decision of the respondent Court of Tax Appeals ishereby AFFIRMED. No pronouncement as to costs. SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Paras, Feliciano,Gancayco, Padilla, Bidin, Cortes, Griño-Aquino and Medialdea, JJ., concur.

THE PROVINCE OF MISAMIS ORIENTAL, represented by its PROVINCIALTREASURER, petitioner,vs.CAGAYAN ELECTRIC POWER AND LIGHT COMPANY, INC.(CEPALCO), respondent.

Jaime A. Chaves for petitioner.

Quiason, Makalintal, Barot & Torres for respondent.

GRIÑO-AQUINO, J.:

The issue in this case is a legal one: whether or not a corporation whose franchiseexpressly provides that the payment of the "franchise tax of three per centum of thegross earnings shall be in lieu of all taxes and assessments of whatever authority uponprivileges, earnings, income, franchise, and poles, wires, transformers, and insulatorsof the grantee." (p. 20, Rollo ), is exempt from paying a provincial franchise tax.

Cagayan Electric Power and Light Company, Inc. (CEPALCO for short) was granted afranchise on June 17, 1961 under Republic Act No. 3247 to install, operate andmaintain an electric light, heat and power system in the City of Cagayan de Oro and itssuburbs. Said franchise was amended on June 21, 1963 by R.A. No. 3570 whichadded the municipalities of Tagoloan and Opol to CEPALCO's sphere of operation,and was further amended on August 4, 1969 by R.A. No. 6020 which extended its fieldof operation to the municipalities of Villanueva and Jasaan.

R.A. Nos. 3247, 3570 and 6020 uniformly provide that:



Sec. 3. In consideration of the franchise and rights hereby granted, thegrantee shall pay a franchise tax equal to three per centum of the grossearnings for electric current sold under this franchise, of which two per centum goes into the National Treasury and one per centum goes into thetreasury of the Municipalities of Tagoloan, Opol, Villanueva and Jasaanand Cagayan de Oro City, as the case may be: Provided , That the saidfranchise tax of three per centum of the gross earnings shall be in lieu of all

taxes and assessments of whatever authority upon privileges earnings , income , franchise ,and poles , wires , transformers , and insulators of the grantee from which taxes and assessments the grantee is hereby expressly exempted . (Emphasis supplied . )

On June 28, 1973, the Local Tax Code (P.D. No. 231) was promulgated, Section 9 ofwhich provides:

Sec. 9. Franchise Tax .—Any provision of special laws to the contrary notwithstanding , the province may impose a tax on businesses enjoying franchise , based on the gross receipts realized within its territorial

jurisdiction, at the rate of not exceeding one-half of one per cent of thegross annual receipts for the preceding calendar year.

In the case of newly started business, the rate shall not exceed threethousand pesos per year. Sixty per cent of the proceeds of the tax shallaccrue to the general fund of the province and forty per cent to the generalfund of the municipalities serviced by the business on the basis of the grossannual receipts derived therefrom by the franchise holder. In the case of a

newly started business, forty per cent of the proceeds of the tax shall bedivided equally among the municipalities serviced by the business.(Emphasis supplied.)

Pursuant thereto, the Province of Misamis Oriental (herein petitioner) enactedProvincial Revenue Ordinance No. 19, whose Section 12 reads:

Sec. 12. Franchise Tax .—There shall be levied, collected and paid onbusinesses enjoying franchise tax of one-half of one per cent of their grossannual receipts for the preceding calendar year realized within the territorial

jurisdiction of the province of Misamis Oriental. (p. 27, Rollo .)

The Provincial Treasurer of Misamis Oriental demanded payment of the provincialfranchise tax from CEPALCO. The company refused to pay, alleging that it is exemptfrom all taxes except the franchise tax required by R.A. No. 6020. Nevertheless, inview of the opinion rendered by the Provincial Fiscal, upon CEPALCO's request,upholding the legality of the Revenue Ordinance, CEPALCO paid under protest onMay 27, 1974 the sum of P 4,276.28 and appealed the fiscal's ruling to the Secretary ofJustice who reversed it and ruled in favor of CEPALCO.



On June 26, 1976, the Secretary of Finance issued Local Tax Regulation No. 3-75adopting entirely the opinion of the Secretary of Justice.

On February 16, 1976, the Province filed in the Court of First Instance of MisamisOriental a complaint for declaratory relief praying, among others, that the Courtexercise its power to construe P.D. No. 231 in relation to the franchise of CEPALCO(R.A. No. 6020), and to declare the franchise as having been amended by P.D. No.

231. The Court dismissed the complaint and ordered the Province to return toCEPALCO the sum of P4,276.28 paid under protest.

The Province has appealed to this Court, alleging that the lower court erred in holdingthat:

1) CEPALCO's tax exemption under Section 3 of Republic Act No. 6020 was notamended or repealed by P.D. No. 231;

2) the imposition of the provincial franchise tax on CEPALCO would subvert the

purpose of P.D. No. 231;

3) CEPALCO is exempt from paying the provincial franchise tax; and

4) petitioner should refund CEPALCO's tax payment of P4,276.28.

We find no merit in the petition for review.

There is no provision in P.D. No. 231 expressly or impliedly amending or repealingSection 3 of R.A. No. 6020. The perceived repugnancy between the two statutes

should be very clear before the Court may hold that the prior one has been repealed bythe later, since there is no express provision to that effect (Manila Railroad Co. vs.Rafferty, 40 Phil. 224). The rule is that a special and local statute applicable to aparticular case is not repealed by a later statute which is general in its terms,provisions and application even if the terms of the general act are broad enough toinclude the cases in the special law (id .) unless there is manifest intent to repeal oralter the special law.

Republic Acts Nos. 3247, 3570 and 6020 are special laws applicable only to

CEPALCO, while P.D. No. 231 is a general tax law. The presumption is that the speciastatutes are exceptions to the general law (P.D. No. 231) because they pertain to aspecial charter granted to meet a particular set of conditions and circumstances.

The franchise of respondent CEPALCO expressly exempts it from payment of "alltaxes of whatever authority" except the three per centum (3%) tax on its grossearnings.

In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied,established by, or collected by any authority" found in the franchise of the Visayan



Electric Company was held to exempt the company from payment of the 5% tax oncorporate franchise provided in Section 259 of the Internal Revenue Code (VisayanElectric Co. vs. David, 49 O.G. [No. 4] 1385).

Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name andnature" in the franchise of the Manila Railroad (Subsection 12, Section 1, Act No.1510) exempts the Manila Railroad from payment of internal revenue tax for its

importations of coal and oil under Act No. 2432 and the Amendatory Acts of thePhilippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).

The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No.1497) justified the exemption of the Philippine Railway Company from payment of thetax on its corporate franchise under Section 259 of the Internal Revenue Code, asamended by R.A. No. 39 (Philippine Railway Co. vs. Collector of Internal Revenue, 91Phil. 35).

Those magic words: "shall be in lieu of all taxes" also excused the Cotabato Light andIce Plant Company from the payment of the tax imposed by Ordinance No. 7 of theCity of Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231).

So was the exemption upheld in favor of the Carcar Electric and Ice Plant Companywhen it was required to pay the corporate franchise tax under Section 259 of theInternal Revenue Code, as amended by R.A. No. 39 (Carcar Electric & Ice Plant vs.Collector of Internal Revenue, 53 O.G. [No. 4] 1068). This Court pointed out that suchexemption is part of the inducement for the acceptance of the franchise and therendition of public service by the grantee. As a charter is in the nature of a private

contract, the imposition of another franchise tax on the corporation by the localauthority would constitute an impairment of the contract between the government andthe corporation.

Recently, this Court ruled that the franchise (R.A. No. 3843) of the Lingayen GulfElectric Power Company which provided that the company shall pay:

tax equal to 2% per annum of the gross receipts . . . and shall be in lieu ofany and all taxes . . . now or in the future . . . from which taxes . . . thegrantee is hereby expressly exempted and . . . no other tax . . . other than

the franchise tax of 2% on the gross receipts as provided for in the originalfranchise shall be collected.

exempts the company from paying the franchise tax under Section 259 of theNational Internal Revenue Code (Commissioner of Internal Revenue vs.Lingayen Gulf Electric Power Co., Inc., G.R. No. 23771, August 4, 1988).

On the other hand, the Balanga Power Plant Company, Imus Electric Company, Inc.,Guagua Electric Company, Inc. were subjected to the 5% tax on corporate franchise



under Section 259 of the Internal Revenue Code, as amended, because Act No. 667 ofthe Philippine Commission and the ordinance or resolutions granting their respectivefranchises did not contain the "in-lieu-of-all-taxes" clause (Balanga Power Plant Co. vs.Commissioner of Internal Revenue, G.R. No. L-20499, June 30, 1965; Imus ElectricCo. vs. Court of Tax Appeals, G.R. No. L-22421, March 18, 1967; Guagua ElectricLight vs. Collector of Internal Revenue, G.R. No. L-23611, April 24, 1967).

Local Tax Regulation No. 3-75 issued by the Secretary of Finance on June 26, 1976,has made it crystal clear that the franchise tax provided in the Local Tax Code (P.D.No. 231, Sec. 9) may only be imposed on companies with franchises that do notcontain the exempting clause. Thus it provides:

The franchise tax imposed under local tax ordinance pursuant to Section 9of the Local Tax Code, as amended, shall be collected from businessesholding franchise but not from business establishments whose franchisecontain the "in-lieu-of-all-taxes-proviso".

Manila Electric Company vs . Vera , 67 SCRA 351, cited by the petitioner, is notapplicable here because what the Government sought to impose on Meralco in thatcase was not a franchise tax but a compensating tax on the poles, wires, transformersand insulators which it imported for its use.

WHEREFORE, the petition for review is denied, and the decision of the Court of FirstInstance is hereby affirmedin toto . No costs.

SO ORDERED.

CITY GOVERNMENT OF SAN PABLO, LAGUNA, CITY TREASURER OF SANPABLO, LAGUNA and THE SANGGUNIANG PANGLUNSOD OF SAN PABLO,LAGUNA, petitioners,vs.HONORABLE BIENVENIDO V. REYES, in his capacity as Presiding Judge,Regional Trial Court, Branch 29, San Pablo City and the MANILA ELECTRICCOMPANY, respondents.

GONZAGA-REYES, J.:

This is a petition under Rule 45 of the Rules of Court to review on a pure question oflaw the decision of the Regional Trial Court (RTC) of San Pablo City, Branch 29 in CivilCase No. SP-4359(96), entitled "Manila Electric Company vs. City of San Pablo,Laguna, City Treasurer of San Pablo Laguna, and the Sangguniang Panglunsod ofSan Pablo City, Laguna." The RTC declared the imposition of a franchise tax underSection 2.09 Article D of Ordinance No. 56 otherwise known as the Revenue Code of



the City of San Pablo as ineffective and void insofar as the respondent MERALCO isconcerned for being violative of Act No. 3648, Republic Act No. 2340 and PD 551. TheRTC also granted MERALCO'S claim for refund of franchise taxes paid under protest.

The following antecedent facts are undisputed:

Act No. 3648 granted the Escudero Electric Service Company a legislative franchise to

maintain and operate an electric light and power system in the City of San Pablo andnearby municipalities. Section 10 of Act No. 3648 provides:

. . . In consideration of the franchise and rights hereby granted, the granteeshall pay unto the municipal treasury of each municipality in which it issupplying electric current to the public under this franchise, a tax equal totwo percentum of the gross earnings from electric current sold or suppliedunder this franchise in each said municipality. Said tax shall be due andpayable quarterly and shall be in lieu of any and all taxes of any kind natureor description levied, established or collected by any authority whatsoever,municipal, provincial or insular, now or in the future, on its poles, wires,insulator, switches, transformers, and structures, installations, conductors,and accessories placed in and over and under all public property, includingpublic streets and highways, provincial roads, bridges and public squares,and on its franchise, rights. privileges, receipts, revenues and profits fromwhich taxes the grantee is hereby expressly exempted.

Escudero's franchise was transferred to the plaintiff (herein respondent) MERALCOunder Republic Act No. 2340.

Presidential Decree No. 551 was enacted on September 11, 1974. Section 1 thereofprovides the following:

Sec. 1. Any provision of law or local ordinance to the contrarynotwithstanding, the franchise tax payable by all grantees of franchise togenerate, distribute and sell electric current for light, heat and power shallbe two percent (2%) of their gross receipts received from the sale ofelectric current and from transactions incident to the generation, distributionand sale of electric current.

Such franchise tax shall be payable to the Commissioner of InternalRevenue of his duly authorized representative on or before the twentiethday of the month following the end of each calendar quarter or month asmay be provided in the respective franchise or pertinent municipalregulation and shall, any provision of the Local Tax Code or any other lawto the contrary notwithstanding, be in lieu of all taxes and assessments ofwhatever nature imposed by any national or local authority on earnings,



receipts, income and privilege of generation, distribution and sale of electriccurrent.

Republic Act No. 7160, otherwise known as the "Local Government Code of 1991"(hereinafter referred to as LGC) took effect on January 1, 1992. The said Codeauthorizes the province/city to impose a tax on business enjoying a franchise at a ratenot exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for

the preceding calendar year realized within its jurisdiction.

On October 5, 1992, the Sangguniang Panglunsod of San Pablo City enactedOrdinance No. 56, otherwise known as the Revenue Code of the City of San Pablo.The said Ordinance took effect on October 30, 1992. 1

Sec. 2.09, Article D of said Ordinance provides:

Sec. 2.09. Franchise Tax — There is hereby imposed a tax on businessenjoying a franchise, at a rate of fifty percent (50%) of one percent (1%) of

the cross annual receipts, which shall include both cash sales and sales onaccount realized during the preceding calendar year within the city.

Pursuant to the above-quoted Section 2.09, the petitioner City Treasurer sent to privaterespondent a letter demanding payment of the aforesaid franchise tax. From 1994 to1996, private respondent paid "under protest" a total amount of P1,857,711.67. 2

The private respondent subsequently filed this action before the Regional Trial Court todeclare Ordinance No. 56 null and void insofar as it imposes the franchise tax uponprivate respondent MERALCO 3 and to claim for a refund of the taxes paid.

The Court ruled in favor of MERALCO and upheld its argument that the LGC did notexpressly or impliedly repeal the tax exemption/incentive enjoyed by it under its charterThe dispositive portion of the decision reads:

WHEREFORE, the imposition of a franchise tax under Sec. 2.09, Article Dof Ordinance No. 56 otherwise known as the Revenue Code of the City ofSan Pablo, is declared ineffective and null and void insofar as the plaintiffMERALCO is concerned for being of Republic Act. No. 2340, PD 551, and

Republic Act No. 7160 and defendants are ordered to refund to the plaintiffthe amount of ONE MILLION EIGHT HUNDRED FIFTY SEVENTHOUSAND SEVEN HUNDRED ELEVEN & 67/100 (P1,857,711.67) andsuch other amounts as may have been paid by the plaintiff under saidRevenue Ordinance No. 56 after the filling of the complaint. 4

SO ORDERED.



Its motion for records for reconsideration having been denied by the trial court. 5 thepetitioners filed the instant petition with this Court raising pure question of law basedon the following grounds:

I. RESPONDENT JUDGE GRAVELY ERRED IN HOLDINGTHAT ACT NO. 3648, REPUBLIC ACT NO 2340 ANDPRESIDENTIAL DECREE NO. 551, AS AMENDED, INSOFAR

AS THEY GRANT TAX INCENTIVES, PRIVILEGES ANDIMMUNITIES TO PRIVATE RESPONDENT, HAVE NOT BEENREPEALED BY REPUBLIC ACT NO. 7160.

II. RESPONDENT JUDGE GRAVELY ERRED IN RULINGTHAT SECTION 193 OF REPUBLIC ACT NO. 7160 HAS NOTWITHDRAWN THE TAX INCENTIVES, PRIVILEGES ANDIMMUNITIES BEING ENJOYED BY THE PRIVATERESPONDENT UNDER ACT NO. 3648 REPUBLIC ACT NO.2340 AND PRESIDENTIAL DECREE NO. 551 AS AMENDED.

III. RESPONDENT JUDGE GRAVELY ERRED IN HOLDINGTHAT THE FRANCHISE TAX IN QUESTION CONSTITUTESAN IMPAIRMENT OF THE CONTRACT BETWEEN THEGOVERNMENT AND PRIVATE RESPONDENT.

Petitioners' position is that RA 7160 (LGC) expressly repealed Act No. 3648, RepublicAct No. 2340 and Presidential Decree 551 and that pursuant to the provisions ofSections 137 and 193 of the LGC, the province or city now has the power to impose a

franchise tax on a business enjoying a franchise. Petitioners rely on the ruling in thecase of Mactan Cebu International Airport Authority vs . Marcos 6 where the SupremeCourt held that the exemption from real property tax granted to Mactan CebuInternational Airport Authority under its charter has been withdrawn upon the effectivityof the LGC.

In addition, the petitioners cite in their Memorandum dated December 8, 1993 anadministrative interpretation made by the Bureau of Local Government Finance of theDepartment of Finance in its 3rd indorsement dated February 15, 1994 to the effectthat the earlier ruling of the Department of Finance that holders of franchise which

contain the phrase "in lieu of all taxes" proviso are exempt from the payment of anykind of tax is no longer applicable upon the effectivity of the LGC in view of thewithdrawal of tax exemption privileges as provided in Sections 193 and 234 thereof.

We resolve to reverse the court a quo .

The pivotal issue is whether the City of San Pablo may impose a local franchise taxpursuant to the LGC upon the Manila Electric Company which pays a tax equal to two



percent of its gross receipts in lieu of all taxes and assessments of whatever natureimposed by any national or local authority on savings or income.

It is necessary to reproduce the pertinent provisions of the LGC.

Sec. 137 — Franchise Tax — Notwithstanding any exemption granted byany law or other special law, the province may impose a tax on business

enjoying a franchise, at a rate not exceeding fifty percent 50% of onepercent 1% of the gross annual receipts for the preceding calendar yearbased on the incoming receipts, or realized, within its territorial jurisdiction.. . .

Sec. 151 — Scope of Taxing Powers — Except as otherwise provided inthis Code, the city, may levy the taxes, fees, and charges which theprovince or municipality may impose: Provided , however , That the taxes,fees and charges levied and collected by highly urbanized and independentcomponent cities shall accrue to them and distributed in accordance withthe provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum ratesallowed for the province or municipality by not more than fifty percent (50%)except the rates of professional and amusement taxes.

Sec. 193 — Withdrawal of Tax Exemption Privileges — Unless otherwiseprovided in this Code, tax exemptions or incentives granted to, or presentlyenjoyed by all persons, whether natural or juridical, including government-

owned or controlled corporations, except local water districts, cooperativesduly registered under R.A. 6938, non- stock and non-profit hospitals andeducational institutions, are hereby withdrawn upon the effectivity of thisCode.

Sec. 534 (f) — Repealing Clause — All general and special law, acts, citycharters, decrees, executive orders, proclamation and administrativeregulations, or part or parts thereof which are inconsistent with any of theprovisions of this code are hereby repealed or modified accordingly.

Sec. 534 (f), the repealing clause of the LGC, provides that all general and speciallaws, act, city charters, decrees, executive orders, proclamations and administrativeregulations or parts thereof which are inconsistent with any of the provisions of theCode are hereby repealed or modified accordingly.

This clause partakes of the nature of a general repealing clause. 7 It is certainly not anexpress repealing clause because it fails to designate the specific act or acts identifiedby number or title, that are intended to be repealed.8



Was there an implied repeal by Republic Act No. 7160 of the MERALCO franchiseinsofar as the latter imposes a 2% tax "in lieu of all taxes and assessments of whatevernature"?

We rule affirmatively.

We are mindful of the established rule that repeals by implication are not favored as

laws are presumed to be passed with deliberation and full knowledge of all lawsexisting on the subject. A general law cannot be construed to have repealed a speciallaw by mere implication unless the intent to repeal or alter is manifest 9 and it must beconvincingly demonstrated that the two laws are so clearly repugnant and patentlyinconsistent that they cannot co-exist. 10

It is our view that petitions correctly rely on the provisions of Sections 137 and 193 ofthe LGC to support their position that MERALCO`s tax exemption has been withdrawn.The explicit language of Section 137 which authorizes the province to impose franchisetax "notwithstanding any exemption granted by any law or other special law" is all-encompassing and clear. The franchise tax is imposable despite any exemptionenjoyed under special laws.

Sec. 193 buttresses the withdrawal of extant tax exemption privileges. By stating thatunless otherwise provided in this Code, tax exemptions or incentives granted to orpresently enjoyed by all persons whether natural or juridical, including government-owned or controlled corporations except 1) local water districts, 2) cooperatives dulyregistered under R.A. 6938, (3) non-stock and non-profit hospitals and educationalinstitutions, are withdrawn upon the effectivity of this code, the obvious import is to limit

the exemptions to the three enumerated entities. It is a basic precept of statutoryconstruction that the express mention of one person, thing, act, or consequenceexcludes all others as expressed in the familiar maxim expressio untus est exclusio alterius . 11 In the absence of any provision of the Code to the contrary, and we find noother provision in point, any existing tax exemption or incentive enjoyed by MERALCOunder existing law was clearly intended to be withdrawn.

Reading together Sections 137 and 193 of the LGC, we conclude that under the LGCthe local government unit may now impose a local tax at a rate not exceeding 50% of1% of the gross annual receipts for the preceding calendar year based on the incoming

receipts realized within its territorial jurisdiction. The legislative purpose to withdraw taxprivileges enjoy under existing law or charter is clearly manifested by the languageused in Sections 137 end 193 categorically withdrawing such exemption subject only tothe exceptions enumerated. Since it would be not only tedious and impractical toattempt to enumerate all the existing statutes providing for special tax exemptions orprivileges, the LGC provided for an express, albeit general, withdrawal of suchexemptions or privileges. No more unequivocal language could have been used.



It is true that the phrase "in lieu of all taxes" found in special franchises has been heldin several cases to exempt the franchise holder from payment of tax on its corporatefranchise imposed of the Internal Revenue Code, as the charter is in the nature of aprivate contract and the exemption is part of the inducement for the acceptance of thefranchise, and that the imposition of another franchise tax by the local authority wouldconstitute an impairment of contract between the government and thecorporation. 12 But these "magic words" contained in the phrase "shall be in lieu of all

taxes'' 13 have to give way to the peremptory language of the LGC specifically providingfor the withdrawal of such exemption privileges.

Accordingly in Mactan Cebu International Airport Authority vs .Marcos . 14 this Court held that Section 193 of the LGC prescribes the general rule, viz .,the tax exemption or incentives, granted to or presently enjoyed by natural or juridicalpersons are withdrawn upon the effectivity of the LGC except with respect to thoseentities expressly enumerated. In the same vein, We must hold that the expresswithdrawal upon effectivity of the LGC of all exemptions except only as provided

therein, can no longer be invoked by Meralco to disclaim liability for the local tax.

Private respondents further argue that the "in lieu of" provision contained in PD 551,Act. No. 3648 and RA 2340 does not partake of the nature of an exemption, but is a"commutative tax". This contention was raised but was not upheld in Cagayan Electric Power and Light Co . Inc . vs . Commissioner of Internal Revenue 15 wherein theSupreme Court stated:

. . . Congress could impair petitioner's legislative franchise by making itliable for income tax from which heretofore it was exempted by virtue of the

exemption provided for in section 3 of its franchise . . .

. . . Republic Act No. 5431, in amending section 24 of the Tax Code bysubjecting to income tax all corporate tax payers not expressly exemptedtherein and in section 27 of the Code, had the effect of withdrawingpetitioner's exemption from income tax . . .

Private respondent's invocation of the non-impairment clause of the Constitution isaccordingly unavailing. The LGC was enacted in pursuance of the constitutional policyto ensure autonomy to local governments 16 and to enable them to attain fullest

development as self-reliant communities. 17 Thus in Mactan Cebu International Airport Authority vs . Marcos , supra , this Court pointed out, in upholding the withdrawal of thereal estate tax exemption previously enjoyed by the Mactan Cebu International AirportAuthority, as follows:

Note that as reproduced in Section 234 (a) the phrase ''and anygovernment-owned or controlled corporation so exempt by its charter" wasexcluded. The justification for this restricted exemption in Section 234(a)seems obvious: to limit further tax exemption privileges, especially in light



of the general provision on withdrawal of tax exemption privileges inSection 193 and the special provision on withdrawal of exemption frompayment of real property taxes in the last paragraph of Section 234. Thesepolicy considerations are consistent with the State policy to ensureautonomy to local governments and the objective of the LGC that theyenjoy genuine and meaningful local autonomy to enable them to attain theirfullest development as self-reliant communities and make them effective

partners in the attainment of national goals. The power to tax is the mosteffective instrument to raise needed revenues to finance and supportmyriad activities of local government units for the delivery of basic servicesessential to the promotion of the general welfare and the enhancement ofpeace, progress, and prosperity of the people. It may also be relevant torecall that the original reasons for the withdrawal of tax exemptionprivileges granted to government-owned or controlled corporations and allother units of government were that such privilege resulted in serious taxbase erosion and distortions in the tax treatment of similarly situated

enterprises, and there was a need for these entities to share in therequirements of development, fiscal or otherwise, by paying the taxes andother charges due from them. 18

The Court therein concluded that:

nothing can prevent Congress from decreeing that even instrumentalities oragencies of the Government performing governmental functions may besubject to tax. Where it is done precisely to fulfill a constitutional mandateand national policy, no one can doubt its wisdom. 19

The power to tax is primarily vested in Congress. However, in our jurisdiction, it may beexercised by local legislative bodies, no longer merely by virtue of a valid delegation asbefore, but pursuant to direct authority conferred by Section 5, Article X of theConstitution. 20 Thus Article X, Section 5 of the Constitution reads:

Sec. 5 — Each Local Government unit shall have the power to create itsown sources of revenue and to levy taxes, fees and charges subject tosuch guidelines and limitations as the Congress may provide, consistentwith the basic policy of local autonomy. Such taxes, fees and charges shall

accrue exclusively to the Local Governments.

The important legal effect of Section 5 is that henceforth, in interpreting statutoryprovision on municipal fiscal powers, doubts will have to resolved in favor ofmunicipal corporations. 21

There is further basis for tire conclusion that the non-impairment of contract clausecannot be invoked to uphold Meralco's exemption from the local tax. Escudero ElectricCo. was originally given the legislative franchise under Act. 3648 to operate an electric



light and power system in the City of San Pablo and nearby municipalities. The term ofthe franchise under Act. No. 3648 is a period of fifty years from the Act's approval in1929. The said law provided that the franchise is granted upon the condition that itshall be subject to amendment, or repeal by the Congress of the UnitedStates. 22 Under the 1935. 23 the 1973 24 and the 1987 25 Constitutions, no franchise orright shall be granted except under the condition that it shall be subject to amendment,alteration or repeal by the National Assembly when the public interest so requires. With

or without the reservation clause, franchises are subject to alterations through areasonable exercise of the police power; they are also subject to alteration by thepower to tax, which like police power cannot be contracted away. 26

Finally, while the matter is not of controlling significance, the Court notes that whereasthe original Escudero franchise exempted the franchise holder from all taxes levied orcollected "now or in the future" 27 this phrase is noticeably omitted in the counterpartprovision of P.D. 551; that said omission is intended not to foreclose future taxes mayreasonably be deduced by statutory construction.

WHEREFORE, the instant petition is GRANTED. The decision of the Regional TrialCourt of San Pablo City, appealed from is hereby reversed and set aside and thecomplaint of MERALCO is hereby DISMISSED.

No pronouncement as to costs.

SO ORDERED.

Romero, Vitug, Panganiban and Purisima, JJ., concur.

MANILA ELECTRIC COMPANY, petitioner,vs.PROVINCE OF LAGUNA and BENITO R. BALAZO, in his capacity as ProvincialTreasurer of Laguna,respondents.

VITUG, J.:

On various dates, certain municipalities of the Province of Laguna, including, Biñan,Sta. Rosa, San Pedro, Luisiana, Calauan and Cabuyao, by virtue of existing laws thenin effect, issued resolutions through their respective municipal councils grantingfranchise in favor of petitioner Manila Electric Company ("MERALCO") for the supply ofelectric light, heat and power within their concerned areas. On 19 January 1983,MERALCO was likewise granted a franchise by the National ElectrificationAdministration to operate an electric light and power service in the Municipality ofCalamba, Laguna.



On 12 September 1991, Republic Act No. 7160, otherwise known as the "LocalGovernment Code of 1991," was enacted to take effect on 01 January 1992 enjoininglocal government units to create their own sources of revenue and to levy taxes, feesand charges, subject to the limitations expressed therein, consistent with the basicpolicy of local autonomy. Pursuant to the provisions of the Code, respondent provinceenacted Laguna Provincial Ordinance No. 01-92, effective 01 January 1993, providing,in part, as follows:

Sec. 2.09. Franchise Tax. — There is hereby imposed a tax on businessesenjoying a franchise, at a rate of fifty percent (50%) of one percent (1%) ofthe gross annual receipts, which shall include both cash sales and sales onaccount realized during the preceding calendar year within this province,including the territorial limits on any city located in the province.

On the basis of the above ordinance, respondent Provincial Treasurer sent a demandletter to MERALCO for the corresponding tax payment. Petitioner MERALCO paid thetax, which then amounted to P19,520.628.42, under protest. A formal claim for refundwas thereafter sent by MERALCO to the Provincial Treasurer of Laguna claiming thatthe franchise tax it had paid and continued to pay to the National Government pursuantto P.D. 551 already included the franchise tax imposed by the Provincial TaxOrdinance. MERALCO, contended that the imposition of a franchise tax under Section2.09 of Laguna Provincial Ordinance No. 01-92, insofar as it concerned MERALCO,contravened the provisions of Section 1 of P.D. 551 which read:

Any provision of law or local ordinance to the contrary notwithstanding, thefranchise tax payable by all grantees of franchises to generate, distribute

and sell electric current for light, heat and power shall be two per cent (2%)of their gross receipts received from the sale of electric current and fromtransactions incident to the generation, distribution and sale of electriccurrent.

Such franchise tax shall be payable to the Commissioner of InternalRevenue or his duly authorized representative on or before the twentiethday of the month following the end of each calendar quarter or month, asmay be provided in the respective franchise or pertinent municipalregulation and shall, any provision of the Local Tax Code or any other law

to the contrary notwithstanding, be in lieu of all taxes and assessments ofwhatever nature imposed by any national or local authority on earnings,receipts, income and privilege of generation, distribution and sale of electriccurrent.

On 28 August 1995, the claim for refund of petitioner was denied in a letter signed byGovernor Jose D. Lina relied on a more recent law, i .e . Republic Act No. 7160 or theLocal Government Code of 1991, than the old decree invoked by petitioner.



On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of Sta.Cruz, Laguna, a complaint for refund, with a prayer for the issuance of a writ ofpreliminary injunction and/or temporary restraining order, against the Province ofLaguna and also Benito R. Balazo in his capacity as the Provincial Treasurer ofLaguna. Aside from the amount of P19,520,628.42 for which petitioner MERALCO hadpriorly made a formal request for refund, petitioner thereafter likewise made additionalpayments under protest on various dates totaling P27,669,566.91.

The trial court, in its assailed decision of 30 September 1997, dismissed the complaintand concluded:

WHEREFORE, IN THE LIGHT OF ALL THE FOREGOINGCONSIDERATIONS, JUDGMENT is hereby rendered in favor of thedefendants and against the plaintiff, by:

1. Ordering the dismissal of the Complaint; and

2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding,reasonable and enforceable. 2

In the instant petition, MERALCO assails the above ruling and brings up the followingissues; viz :

1. Whether the imposition of a franchise tax under Section 2.09 of LagunaProvincial Ordinance No. 01-92, insofar as petitioner is concerned, isviolative of the non-impairment clause of the Constitution and Section 1 ofPresidential Decree No. 551.

2. Whether Republic Act No. 7160, otherwise known Local GovernmentCode of 1991, has repealed, amended or modified Presidential Decree No.551.

3. Whether the doctrine of administrative remedies is applicable in thiscase. 3

The petition lacks merit.

Prefatorily, it might be well to recall that local governments do not have the inherentpower to tax 4 except to the extent that such power might be delegated to them eitherby the basic law or by statute. Presently, under Article X of the 1987 Constitution, ageneral delegation of that power has been given in favor of local government units.Thus:

Sec. 3. The Congress shall enact a local government code which shallprovide for a more responsive and accountable local government structureinstituted through a system of decentralization with effective mechanisms of



their fullest development as self-reliant communities and make themeffective partners in the attainment of national goals. The power to tax isthe most effective instrument to raise needed revenues to finance andsupport myriad activities if local government units for the delivery of basicservices essential to the promotion of the general welfare and theenhancement of peace, progress, and prosperity of the people. It may alsobe relevant to recall that the original reasons for the withdrawal of tax

exemption privileges granted to government-owned and controlledcorporations and all other units of government were that such privilegeresulted in serious tax base erosion and distortions in the tax treatment ofsimilarity situated enterprises, and there was a need for these entities toshare in the requirements of development, fiscal or otherwise, by payingthe taxes and other charges due from them. 10

Petitioner in its complaint before the Regional Trial Court cited the ruling of this Courtin Province of Misamis Oriental vs. Cagayan Electric Power and Light

Company , Inc .;

11

thus:

In an earlier case, the phrase "shall be in lieu of all taxes and at any timelevied, established by, or collected by any authority" found in the franchiseof the Visayan Electric Company was held to exempt the company frompayment of the 5% tax on corporate franchise provided in Section 259 ofthe Internal Revenue Code (Visayan Electric Co. vs. David, 49 O.G. [No. 4]1385)

Similarly, we ruled that the provision: "shall be in lieu of all taxes of every

name and nature" in the franchise of the Manila Railroad (Subsection 12,Section 1, Act No. 1510) exempts the Manila Railroad from payment ofinternal revenue tax for its importations of coal and oil under Act No. 2432and the Amendatory Acts of the Philippine Legislature (Manila Railroad vs.Rafferty, 40 Phil. 224).

The same phrase found in the franchise of the Philippine Railway Co. (Sec.13, Act No. 1497) justified the exemption of the Philippine RailwayCompany from payment of the tax on its corporate franchise under Section259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine

Railway Co vs. Collector of Internal Revenue, 91 Phil. 35).

Those magic words, "shall be in lieu of all taxes" also excused theCotabato Light and Ice Plant Company from the payment of the taximposed by Ordinance No. 7 of the City of Cotabato (Cotabato Light andPower Co. vs. City of Cotabato, 32 SCRA 231).

So was the exemption upheld in favor of the Carcar Electric and Ice PlantCompany when it was required to pay the corporate franchise tax under



Section 259 of the Internal Revenue Code, as amended by R.A. No. 39(Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No.4]. 1068). This Court pointed out that such exemption is part of theinducement for the acceptance of the franchise and the rendition of publicservice by the grantee. 2

In the recent case of the City Government of San Pablo , etc ., et al . vs. Hon.

Bienvenido V. Reyes , et al ., 13 the Court has held that the phrase in lieu of all taxes"have to give way to the peremptory language of the Local Government Codespecifically providing for the withdrawal of such exemptions, privileges," and that "uponthe effectivity of the Local Government Code all exemptions except only as providedtherein can no longer be invoked by MERALCO to disclaim liability for the local tax." Infine, the Court has viewed its previous rulings as laying stress more on the legislativeintent of the amendatory law — whether the tax exemption privilege is to be withdrawnor not — rather than on whether the law can withdraw, without violating theConstitution, the tax exemption or not.

While the Court has, not too infrequently, referred to tax exemptions contained inspecial franchises as being in the nature of contracts and a part of the inducement forcarrying on the franchise, these exemptions, nevertheless, are far from being strictlycontractual in nature. Contractual tax exemptions, in the real sense of the term andwhere the non-impairment clause of the Constitution can rightly be invoked, are thoseagreed to by the taxing authority in contracts, such as those contained in governmentbonds or debentures, lawfully entered into by them under enabling laws in which thegovernment, acting in its private capacity, sheds its cloak of authority and waives itsgovernmental immunity. Truly, tax exemptions of this kind may not be revoked without

impairing the obligations of contracts. 14 These contractual tax exemptions, however,are not to be confused with tax exemptions granted under franchises. A franchisepartakes the nature of a grant which is beyond the purview of the non-impairmentclause of the Constitution. 15 Indeed, Article XII, Section 11, of the 1987 Constitution,like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that nofranchise for the operation of a public utility shall be granted except under the conditionthat such privilege shall be subject to amendment, alteration or repeal by Congress asand when the common good so requires.

WHEREFORE, the instant petition is hereby DISMISSED. No costs.1âwphi1.nêt

SO ORDERED.

Romero, Panganiban, Purisima and Gonzaga-Reyes, JJ., concur.

G.R. No. L-15270 September 30, 1961



JOSE V. HERRERA and ESTER OCHANGCO HERRERA, petitioners,vs.THE QUEZON CITY BOARD OF ASSESSMENT APPEALS, respondent.

Angel A. Sison for petitioners.Jaime Agloro for respondent.

CONCEPCION, J.:

Appeal, by petitioners Jose V. Herrera and Ester Ochangco Herrera, from adecision of the Court of Tax Appeals affirming that of the Board of AssessmentAppeals of Quezon City, which held that certain properties of said petitioners aresubject to assessment for purposes of real estate tax.

The facts and the issue are set forth in the aforementioned decision of the Courtof Tax Appeals, from which we quote:

On July 24, 1952, the Director of the Bureau of Hospitals authorized thepetitioners to establish and operate the "St. Catherine's Hospital", located at 58D. Tuazon, Sta. Mesa Heights, Quezon City (Exhibit "F-1", p. 7, BIR rec.). On orabout January 3, 1953, the petitioners sent a letter to the Quezon City Assessorrequesting exemption from payment of real estate tax on the lot, building andother improvements comprising the hospital stating that the same wasestablished for charitable and humanitarian purposes and not for commercialgain (Exhibit "F-2", pp. 8-9, BIR rec.). After an inspection of the premises inquestion and after a careful study of the case, the exemption from real propertytaxes was granted effective the years 1953, 1954 and 1955.

Subsequently, however, in a letter dated August 10, 1955 (Exhibit "E", p.65, CTA rec.) the Quezon City Assessor notified the petitioners that the aforesaidproperties were re-classified from exempt to "taxable" and thus assessed for realproperty taxes effective 1956, enclosing therewith copies of Tax DeclarationsNos. 19321 to 19322 covering the said properties. The petitioners appealed the

assessment to the Quezon City Board of Assessment Appeals, which, in adecision dated March 31, 1956 and received by the former on May 17, 1956,affirmed the decision of the City Assessor. A motion for reconsideration thereofwas denied on March 8, 1957. From this decision, the petitioners instituted theinstant appeal.1awphîl.nèt

The building involved in this case is principally used as a hospital. It ismainly a surgical and orthopedic hospital with emphasis on obstetrical cases, thelatter constituting 90% of the total number of cases registered therein. The



hospital has thirty-two (32) beds, of which twenty (20) are for charity-patients andtwelve (12) for pay-patients. From the evidence presented by petitioners, it ismade to appear that there are two kinds of charity patients — (a) those whocome for consultation only ("out-charity patients"); and (b) those who remain inthe hospital for treatment ("lying-in-patients"). The out-charity patients are givenfree consultation and prescription, although sometimes they are furnished withfree medicines which are not costly like aspirin, sulfatiazole, etc. The charity

lying-in-patients are given free medical service and medicine although the foodserved to the pay-patients is very much better than that given to the former.Although no condition is imposed by the hospital on the admission of charitylying-in-patients, they however, usually give donations to the hospital. On theother hand, the pay-patients are required to pay for hospital services rangingfrom the minimum charge of P5.00 to the maximum of P40.00 for each day ofstay in the hospital. The income realized from pay-patients is spent for theimprovement of the charity wards. The hospital personnel is composed of threenurses, two graduate midwives, a resident physician receiving a salary of

P170.00 a month and the petitioner, Dr. Ester Ochangco Herrera, as directress.As such directress, the latter does not receive any salary.

Petitioners also operate within the premises of the hospital the "St.Catherine's School of Midwifery" which was granted government recognition bythe Secretary of Education on February 1, 1955 (Exhibit "F-3", p. 10, BIR rec.)This school has an enrollment of about two hundred students. The students arecharged a matriculation fee of P300.00 for 1-½ years, plus P50.00 a month forboard and lodging, which includes transportation to the St. Mary's Hospital. Thestudents practice in the St. Catherine's Hospital, as well as in the St. Mary's

Hospital, which is also owned by the petitioners. A separate set of accountingbooks is maintained by the school for midwifery distinct from that kept by thehospital. The petitioners alleged that the accounts of the school are not includedin Exhibits "A", "A-1", "A-2", "B", "B-1", "B-2", "C", "C-1" and "C-2" which relate tothe hospital only. However, the petitioners have refused to submit a separatestatement of accounts of the school. A brief tabulation indicating the amount ofincome of the hospital for the years 1954, 1955 and 1956, and its operationalexpenses, is as follows:

1 9 5 4

Income Expenses Deficit

CharityWardPay Ward

P14,779.50

P 5,280.04P10,803.26

P16,083.30

P1,303.80

(Exhibits "A", "A-1" and "A-2")



not been shown to be exclusively for school purposes"; that said portions "rather ...have a dual use, i.e., for classroom and for hospital use, the latter not being a purposethat renders the property tax exempt;" that part of the building and lot in question "isused as a hospital, part as residence of the petitioners, part as garage, part asdormitory and part as school"; and that "the portion dedicated to educational andcharitable purposes can not be identified from those destined to other uses; and thebuilding is itself an indivisible unit of property."

It should be noted, however, that, according to the very statement of facts madein the decision appealed from, of the thirty-two (32) beds in the hospital, twenty (20)are for charity-patients; that "the income realized from pay-patients is spent forimprovement of the charity wards;" and that "petitioners, Dr. Ester Ochangco Herrera,as directress" of said hospital, "does not receive any salary," although its residentphysician gets a monthly salary of P170.00. It is well settled, in this connection, that theadmission of pay-patients does not detract from the charitable character of a hospital, ifall its funds are devoted "exclusively to the maintenance of the institution" as a "public

charity" (84 C.J.S., 617; see, also, 51 Am. Jur. 607; Cooley on Taxation, Vol. 2, p.1562; 144 A.L.R., 1489-1492). "In other words, where rendering charity is its primaryobject, and the funds derived from payments made by patients able to pay are devotedto the benevolent purposes of the institution, the mere fact that a profit has been madewill not deprive the hospital of its benevolent character" (Prairie Du Chien SanitariumCo. vs. City of Prairie Du Chien, 242 Wis. 262, 7 NW [2d] 832, 144 A.L.R. 1480).

Thus, we have held that the U.S.T. Hospital was not established for profit-making purposes, although it had 140 paying beds maintained only to partly financethe expenses of the free wards, containing 203 beds for charity patients (U.S.T.

Hospital Employees Association vs. Sto. Tomas University Hospital, L-6988, May 24,1954), that St. Paul's Hospital of Iloilo, a corporation organized for "charitableeducational and religious purposes" can not be considered as engaged in businessmerely because its pharmacy department charges paying patients the cost of theirmedicine, plus 10% thereof, to partly offset the cost of medicines supplied free ofcharge to charity patients (Collector of Internal Revenue vs. St. Paul's Hospital of Iloilo,L-12127, May 25, 1959), and that the amendment of the original articles ofincorporation of the University of Visayas to convert it from a non-stock to a stockcorporation and the increase of its assets from P9,000 to P50,000, distributed among

the members of the original non-stock corporation in terms of shares of stock, as wellas the subsequent move of its board of trustees to double the stock dividends of thecorporation, in view of a gain of P200,000.00 in property, besides good-will, which wasnot carried out, does not justify the inference that the corporation has become one forbusiness and profit, none of its profits having inured to the benefit of any stockholder orindividual (Collector of Internal Revenue vs. University of Visayas, L-13554, February28, 1961).

Moreover, the exemption in favor of property used exclusively for charitable oreducational purposes is "not limited to property actually indispensable" therefor



(Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are "incidental toand reasonably necessary for" the accomplishment of said purposes, such as, in thecase of hospitals, "a school for training nurses, a nurses' home, property use to providehousing facilities for interns, resident doctors, superintendents, and other members ofthe hospital staff, and recreational facilities for student nurses, interns and residents"(84 C.J.S., 621), such as "athletic fields," including "a farm used for the inmates of theinstitution" (Cooley on Taxation, Vol. 2, p. 1430).

Within the purview of the Constitutional exemption from taxation, the St.Catherine's Hospital is, therefore, a charitable institution, and the fact that it admitspay-patients does not bar it from claiming that it is devoted exclusively to benevolentpurposes, it being admitted that the income derived from pay-patients is devoted to theimprovement of the charity wards, which represent almost two-thirds (2/3) of the bedcapacity of the hospital, aside from "out-charity patients" who come only forconsultation.

Again, the existence of "St. Catherine's School of Midwifery", with an enrollmentof about 200 students, who practice partly in St. Catherine's Hospital and partly in St.Mary's Hospital, which, likewise, belongs to petitioners herein, does not, and cannot,affect the exemption to which St. Catherine's Hospital is entitled under our fundamentallaw. On the contrary, it furnishes another ground for exemption. Seemingly, the Courtof Tax Appeals was impressed by the fact that the size of said enrollment and thematriculation fee charged from the students of midwifery, aside from the amount theypaid for board and lodging, including transportation to St. Mary's Hospital, warrants thebelief that petitioners derive a substantial profit from the operation of the schoolaforementioned. Such factor is, however, immaterial to the issue in the case at bar, for

"all lands, building and improvements used exclusively for religious, charitable oreducational purposes shall be exempt from taxation," pursuant to the Constitution,regardless of whether or not material profits are derived from the operation of theinstitutions in question. In other words, Congress may, if it deems fit to do so, imposetaxes upon such "profits", but said "lands, buildings and improvements" are beyond itstaxing power.

Similarly, the garage in the building above referred to — which was obviouslyessential to the operation of the school of midwifery, for the students therein enrolledpracticed, not only in St. Catherine's Hospital, but, also, in St. Mary's Hospital, andwere entitled to transportation thereto — for Mrs. Herrera received no compensation asdirectress of St. Catherine's Hospital — were incidental to the operation of the latterand of said school, and, accordingly, did not affect the charitable character of saidhospital and the educational nature of said school.

WHEREFORE, the decision of the Court of Tax Appeals, as well as that of theAssessment Board of Appeals of Quezon City, are hereby reversed and set aside, andanother one entered declaring that the lot, building and improvements constituting the



St. Catherine's Hospital are exempt from taxation under the provisions of theConstitution, without special pronouncement as to costs. It is so ordered.

Bengzon, C.J., Padilla, Labrador, Reyes, J.B.L., Paredes and De Leon, JJ., concur.

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, MunicipalTreasurer, Bangued, Abra; HEIRS OF PATERNO MILLARE,respondents.

PARAS, J.:

This is a petition for review on certiorari of the decision * of the defunct Court of FirstInstance of Abra, Branch I, dated June 14, 1974, rendered in Civil Case No. 656,

entitled "Abra Valley Junior College, Inc., represented by Pedro V. Borgonia, plaintiffvs. Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar V. Bosque as MunicipalTreasurer of Bangued, Abra and Paterno Millare, defendants," the decretal portion ofwhich reads:

IN VIEW OF ALL THE FOREGOING, the Court hereby declares:

That the distraint seizure and sale by the Municipal Treasurer of Bangued,Abra, the Provincial Treasurer of said province against the lot and buildingof the Abra Valley Junior College, Inc., represented by Director PedroBorgonia located at Bangued, Abra, is valid;

That since the school is not exempt from paying taxes, it should thereforepay all back taxes in the amount of P5,140.31 and back taxes andpenalties from the promulgation of this decision;

That the amount deposited by the plaintaff him the sum of P60,000.00before the trial, be confiscated to apply for the payment of the back taxesand for the redemption of the property in question, if the amount is less

than P6,000.00, the remainder must be returned to the Director of PedroBorgonia, who represents the plaintiff herein;

That the deposit of the Municipal Treasurer in the amount of P6,000.00also before the trial must be returned to said Municipal Treasurer ofBangued, Abra;

And finally the case is hereby ordered dismissed with costs against theplaintiff.



SO ORDERED. (Rollo, pp. 22-23)

Petitioner, an educational corporation and institution of higher learning dulyincorporated with the Securities and Exchange Commission in 1948, filed a complaint(Annex "1" of Answer by the respondents Heirs of Paterno Millare; Rollo, pp. 95-97) onJuly 10, 1972 in the court a quo to annul and declare void the "Notice of Seizure' andthe "Notice of Sale" of its lot and building located at Bangued, Abra, for non-payment of

real estate taxes and penalties amounting to P5,140.31. Said "Notice of Seizure" of thecollege lot and building covered by Original Certificate of Title No. Q-83 duly registeredin the name of petitioner, plaintiff below, on July 6, 1972, by respondents MunicipalTreasurer and Provincial Treasurer, defendants below, was issued for the satisfactionof the said taxes thereon. The "Notice of Sale" was caused to be served upon thepetitioner by the respondent treasurers on July 8, 1972 for the sale at public auction ofsaid college lot and building, which sale was held on the same date. Dr. PaternoMillare, then Municipal Mayor of Bangued, Abra, offered the highest bid of P6,000.00which was duly accepted. The certificate of sale was correspondingly issued to him.

On August 10, 1972, the respondent Paterno Millare (now deceased) filed throughcounstel a motion to dismiss the complaint.

On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer,through then Provincial Fiscal Loreto C. Roldan, filed their answer (Annex "2" ofAnswer by the respondents Heirs of Patemo Millare; Rollo, pp. 98-100) to thecomplaint. This was followed by an amended answer (Annex "3," ibid , Rollo, pp. 101-103) on August 31, 1972.

On September 1, 1972 the respondent Paterno Millare filed his answer (Annex"5," ibid ; Rollo, pp. 106-108).

On October 12, 1972, with the aforesaid sale of the school premises at public auction,the respondent Judge, Hon. Juan P. Aquino of the Court of First Instance of Abra,Branch I, ordered (Annex "6," ibid ; Rollo, pp. 109-110) the respondents provincial andmunicipal treasurers to deliver to the Clerk of Court the proceeds of the auction sale.Hence, on December 14, 1972, petitioner, through Director Borgonia, deposited withthe trial court the sum of P6,000.00 evidenced by PNB Check No. 904369.

On April 12, 1973, the parties entered into a stipulation of facts adopted and embodiedby the trial court in its questioned decision. Said Stipulations reads:

STIPULATION OF FACTS

COME NOW the parties, assisted by counsels, and to this Honorable Courtrespectfully enter into the following agreed stipulation of facts:



1. That the personal circumstances of the parties as stated in paragraph 1of the complaint is admitted; but the particular person of Mr. Armin M.Cariaga is to be substituted, however, by anyone who is actually holdingthe position of Provincial Treasurer of the Province of Abra;

2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lotand buildings thereon located in Bangued, Abra under Original Certificate

of Title No. 0-83;

3. That the defendant Gaspar V. Bosque, as Municipal treasurer ofBangued, Abra caused to be served upon the Abra Valley Junior College,Inc. a Notice of Seizure on the property of said school under OriginalCertificate of Title No. 0-83 for the satisfaction of real property taxesthereon, amounting to P5,140.31; the Notice of Seizure being the oneattached to the complaint as Exhibit A;

4. That on June 8, 1972 the above properties of the Abra Valley JuniorCollege, Inc. was sold at public auction for the satisfaction of the unpaidreal property taxes thereon and the same was sold to defendant PaternoMillare who offered the highest bid of P6,000.00 and a Certificate of Sale inhis favor was issued by the defendant Municipal Treasurer.

5. That all other matters not particularly and specially covered by thisstipulation of facts will be the subject of evidence by the parties.

WHEREFORE, it is respectfully prayed of the Honorable Court to consider

and admit this stipulation of facts on the point agreed upon by the parties.

Bangued, Abra, April 12, 1973.

Sgd. AgripinoBrillantesTyp AGRIPINOBRILLANTESAttorney forPlaintiff

Sgd. LoretoRoldanTyp LORETOROLDANProvincial FiscalCounsel forDefendantsProvincial



prayer for preliminary injunction before this Court, which petition was filed on August17, 1974 (Rollo, p.2).

In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE tothe petition (Rollo, p. 58). Respondents were required to answer said petition (Rollo, p.74).

Petitioner raised the following assignments of error:

I

THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALEOF THE COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL PURPOSESOF THE PETITIONER.

II

THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT ANDBUILDING OF THE PETITIONER ARE NOT USED EXCLUSIVELY FOREDUCATIONAL PURPOSES MERELY BECAUSE THE COLLEGE PRESIDENTRESIDES IN ONE ROOM OF THE COLLEGE BUILDING.

III

THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT ANDBUILDING OF THE PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXESAND IN ORDERING PETITIONER TO PAY P5,140.31 AS REALTY TAXES.

IV

THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THEP6,000.00 DEPOSIT MADE IN THE COURT BY PETITIONER AS PAYMENT OF THEP5,140.31 REALTY TAXES. (See Brief for the Petitioner, pp. 1-2)

The main issue in this case is the proper interpretation of the phrase "used exclusivelyfor educational purposes."

Petitioner contends that the primary use of the lot and building for educationalpurposes, and not the incidental use thereof, determines and exemption from propertytaxes under Section 22 (3), Article VI of the 1935 Constitution. Hence, the seizure andsale of subject college lot and building, which are contrary thereto as well as to theprovision of Commonwealth Act No. 470, otherwise known as the Assessment Law,are without legal basis and therefore void.

On the other hand, private respondents maintain that the college lot and building inquestion which were subjected to seizure and sale to answer for the unpaid tax are



used: (1) for the educational purposes of the college; (2) as the permanent residenceof the President and Director thereof, Mr. Pedro V. Borgonia, and his family includingthe in-laws and grandchildren; and (3) for commercial purposes because the groundfloor of the college building is being used and rented by a commercial establishment,the Northern Marketing Corporation (See photograph attached as Annex "8"(Comment; Rollo, p. 90]).

Due to its time frame, the constitutional provision which finds application in the case atbar is Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution,which expressly grants exemption from realty taxes for "Cemeteries, churches andparsonages or convents appurtenant thereto, and all lands, buildings, andimprovements used exclusively for religious, charitable or educational purposes ...

Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended byRepublic Act No. 409, otherwise known as the Assessment Law, provides:

The following are exempted from real property tax under the AssessmentLaw:

xxx xxx xxx

(c) churches and parsonages or convents appurtenant thereto, and alllands, buildings, and improvements used exclusively for religious,charitable, scientific or educational purposes.

xxx xxx xxx

In this regard petitioner argues that the primary use of the school lot and building is thebasic and controlling guide, norm and standard to determine tax exemption, and notthe mere incidental use thereof.

As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue , 33 Phil. 217[1916], this Court ruled that while it may be true that the YMCA keeps a lodging and aboarding house and maintains a restaurant for its members, still these do not constitutebusiness in the ordinary acceptance of the word, but an institution used exclusively forreligious, charitable and educational purposes, and as such, it is entitled to be

exempted from taxation.

In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte , 51 Phil.352 [1972], this Court included in the exemption a vegetable garden in an adjacent lotand another lot formerly used as a cemetery. It was clarified that the term "usedexclusively" considers incidental use also. Thus, the exemption from payment of landtax in favor of the convent includes, not only the land actually occupied by the buildingbut also the adjacent garden devoted to the incidental use of the parish priest. The lotwhich is not used for commercial purposes but serves solely as a sort of lodging place,



also qualifies for exemption because this constitutes incidental use in religiousfunctions.

The phrase "exclusively used for educational purposes" was further clarified by thisCourt in the cases of Herrera vs. Quezon City Board of assessment Appeals , 3 SCRA186 [1961] and Commissioner of Internal Revenue vs. Bishop of the Missionary District , 14 SCRA 991 [1965], thus —

Moreover, the exemption in favor of property used exclusively for charitableor educational purposes is 'not limited to property actually indispensable'therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilitieswhich are incidental to and reasonably necessary for the accomplishmentof said purposes, such as in the case of hospitals, "a school for trainingnurses, a nurses' home, property use to provide housing facilities forinterns, resident doctors, superintendents, and other members of thehospital staff, and recreational facilities for student nurses, interns, andresidents' (84 CJS 6621), such as "Athletic fields" including "a firm used forthe inmates of the institution. (Cooley on Taxation, Vol. 2, p. 1430).

The test of exemption from taxation is the use of the property for purposes mentionedin the Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).

It must be stressed however, that while this Court allows a more liberal and non-restrictive interpretation of the phrase "exclusively used for educational purposes" asprovided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution,reasonable emphasis has always been made that exemption extends to facilities which

are incidental to and reasonably necessary for the accomplishment of the mainpurposes. Otherwise stated, the use of the school building or lot for commercialpurposes is neither contemplated by law, nor by jurisprudence. Thus, while the use ofthe second floor of the main building in the case at bar for residential purposes of theDirector and his family, may find justification under the concept of incidental use, whichis complimentary to the main or primary purpose—educational, the lease of the firstfloor thereof to the Northern Marketing Corporation cannot by any stretch of theimagination be considered incidental to the purpose of education.

It will be noted however that the aforementioned lease appears to have been raised for

the first time in this Court. That the matter was not taken up in the to court is reallyapparent in the decision of respondent Judge. No mention thereof was made in thestipulation of facts, not even in the description of the school building by the trial judge,both embodied in the decision nor as one of the issues to resolve in order to determinewhether or not said properly may be exempted from payment of real estate taxes(Rollo, pp. 17-23). On the other hand, it is noteworthy that such fact was not disputedeven after it was raised in this Court.



Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for thefirst time on appeal. Nonetheless, as an exception to the rule, this Court has held thatalthough a factual issue is not squarely raised below, still in the interest of substantial

justice, this Court is not prevented from considering a pivotal factual matter. "TheSupreme Court is clothed with ample authority to review palpable errors not assignedas such if it finds that their consideration is necessary in arriving at a just decision."(Perez vs. Court of Appeals, 127 SCRA 645 [1984]).

Under the 1935 Constitution, the trial court correctly arrived at the conclusion that theschool building as well as the lot where it is built, should be taxed, not because thesecond floor of the same is being used by the Director and his family for residentialpurposes, 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 halfof the assessed tax be returned to the school involved.

PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, BranchI, is hereby AFFIRMED subject to the modification that half of the assessed tax bereturned to the petitioner.

SO ORDERED.

Yap, C.J., Melencio-Herrera, Padilla and Sarmiento, JJ., concur.

C. N. HODGES, petitioner-appellee,vs.THE MUNICIPAL BOARD OF THE CITY OF ILOILO; Honorable Rodolfo Ganzon, in

his capacity as City Mayor of the City of Iloilo; and the CITY OFILOILO, respondents-appellants.

City Fiscal F. R. Consolacion and Assistant City Fiscal E. I. Soriano, Jr. for respondents-appellants.Leon P. Gellada and Norberto J. Posecion for petitioner-appellee.Ozaeta, Gibbs & Ozaeta for administrator PCI Bank.

CASTRO, J.:

The respondents, on appeal by writ of error, ask Us to review a judgment of the Courtof First, Instance of Iloilo, in an action for declaratory relief, annulling ordinance 31,series of 1960, of the City of Iloilo and ordering the said City to reimburse to thepetitioner C. N. Hodges whatever amounts he had paid to the former by reason of theoperation of the ordinance.

The parties are agreed on the antecedent facts. On June 7, 1960, invoking RepublicAct 2264, otherwise known as the Local Autonomy Act, the municipal board of the Cityof Iloilo enacted ordinance 31, entitled "An Ordinance Imposing Municipal Tax On The



A tax ordinance shall go into effect on the fifteenth day after its passage, unlessthe ordinance shall provide otherwise: Provided , however , That the Secretary ofFinance shall have authority to suspend the effectivity of any ordinance withinone hundred and twenty days after its passage, if, in his opinion, the tax or feetherein levied or imposed is unjust, excessive oppressive or confiscatory, andwhen, the said secretary exercises this authority the effectivity of such ordinanceshall be suspended.

In such event the municipal board or city council in the case of cities and themunicipal council or municipal district council in the case of municipalities andmunicipal districts may appeal the decision of the Secretary of Finance to thecourt during the pendency of which case the tax levied shall be considered aspaid under protest.

Nothing in the foregoing quotation even remotely applies to the situation at hand. Theauthority vested in the Secretary of Finance to suspend the effectivity of a taxordinance is limited to cases wherein the tax or fee thereby levied is "unjust, excessive,oppressive or confiscatory". Nowhere in the pleadings below was the tax imposed bythe questioned ordinance challenged by the appellee upon any of these specific bases.He chose to prosecute his case upon the ground that the ordinance was beyond thecorporate powers of the appellant City to enact. This is a purely legal question; no reliefof an administrative nature is or would have been available to the appellee from theSecretary of Finance (Pascual vs. Provincial Board of Nueva Ecija, G.R. L-11959,October 31, 1959; citing, Mondaño vs. Silvosa, 51 Off. Gaz., p. 2884). Besides, it doesnot appear from the aforequoted legal precept that it is the mandatory duty of a partyadversely affected, assuming that the matter comes within the purview of the law, to

invoke the suspension authority of the Secretary of Finance. The said Secretary, fromthe text of the law, may exercise the prerogative vested in him upon his own initiative,i.e "if, in his opinion" the tax or fee levied suffers from any of the infirmities enumeratedAccordingly, it cannot be said that recourse to the Secretary of Finance is aprerequisite to an action in court. And the rule requiring exhaustion of administrativeremedies applies only "when there is an express legal provision requiring exhaustion ofadministrative step as a condition precedent to taking action in court" (Azuelo vs.Arnaldo, et al., 58 O.G., No. 26, pp. 4738, 4740). At all events, even assuming that therecourse indicated by the appellants were indeed a requirement, the same does not

appear to be exclusive. It is discretionary upon the court to permit an aggrieved partyto institute a court action without first resorting to an administrative remedy for thepurpose (Hoskyns vs. National City Bank of New York, et al., 85 Phil. 201). Finding, asWe do, after reading the record, that there exists here a justiciable controversybetween real parties asserting adverse legal interests which is ripe for judicialdetermination (Caltex Philippines, Inc. vs. Palomar, G.R. L-19650, September 29,1966), the recourse to the courts was in no way premature. There is, therefore, noroom for the application of the doctrine of exhaustion of administrative remedies to thecase at bar.



purposes just and uniform taxes, licenses and fees. It would also appear thatmunicipalities and municipal districts are prohibited from imposing anypercentage tax on sales, or other taxes in any form on articles subject to specifictax, except gasoline, under the provisions of the National Internal Revenue Code.

From a cursory analysis of the provisions above-stated We can readily draw theconclusion that the City of Iloilo has the authority and power to approve the

ordinance in question for it merely imposes a percentage tax on the sale of asecond-hand motor vehicle that may be carried out within the city by any person,firm, association or corporation owning or dealing with it who may come within its

jurisdiction. Indeed, it cannot be disputed that a sales tax of ½ of 1% of theselling price of a second-hand motor vehicle comes within the purview of theprovisions of Section 2 of Republic Act 2264. It is true that the tax in question isin the form of a percentage tax on the proceeds of the sale of a second-handmotor vehicle which comes within the prohibition of the section above advertedto; but the prohibition only refers to municipalities and municipal districts and

does not comprehend chartered cities as the City of Iloilo.

We perceive no overriding reason to depart from the doctrine thus laid down.

3. The questioned ordinance, however, does more than merely levy a tax. Itcommands that "The payment of this municipal tax shall be a requirement for theregistration ... of said sale in the Office of the Register of Deeds or the Office of theCity Treasurer of the City of Iloilo" and, for purposes of which, demands that "the taxreceipt shall be made a part of the documents to be presented for registration" (section3). Challenging this requirement, the appellee contended and the trial court agreed

that, in effect, it imposes a condition to the registration of the deed of conveyance nototherwise called for by the general statutory law on the matter and, to that extent,amounts to amending or modifying the applicable statute, which, it is argued, is notwithin the competence of the appellant municipal board of Iloilo City to do.

In the C.N. Hodges vs. The Municipal Board of the City of Iloilo case hereinbeforecited, this Court confronted with a similar question in so far as the registration ofvehicles under the ordinance there involved was concerned, took the view that theimposition of the payment of the tax levied as a prerequisite to the registration of thesale in the Motor Vehicles Office was "merely a coercive measure to make the

enforcement of the contemplated sales tax more effective" and, accordingly, sustainedthe same under the principle of implication, that is, that being a measure reasonablynecessary to carry out the power expressly granted, it was considered impliedlyincluded in the grant of the express power.

However, after carefully re-examining the ruling thus enunciated, We are persuaded tosay that, while We find no cause to doubt the validity there of as a general principle,the same cannot by any means be regarded as a hard-and-fast rule. Applied to specificcases, the broad sweep thereof must be limited or qualified depending upon the



particular attendant circumstances. And We declare that the generality of the rule maynot prevail when, in its application, it runs counter to or tends to impair a specific legalmandate of a superior authority. Put another way, the rule should be that the appellantmunicipal board may resort to all means reasonably necessary and proper to giveeffect to the powers expressly conferred upon it, provided, however, that said meansare not otherwise contrary to any statutory or other more authoritative provision on thesubject.

The registration with the registry of deeds of voluntary conveyances of real propertyunder the Torrens system is, in this jurisdiction, mainly controlled by the LandRegistration Act, Act 496, as amended. Amongst others, this statute provides that "...The act of registration shall be the operative act to convey and affect the land, and inall cases under this Act the registration shall be made in the office of the register ofdeeds for the province or provinces or city where the land lies" (section 50). Therequirements for deeds or other voluntary instruments of conveyance to be registrablethereunder are specified in the law (section 54) and, for purposes of registration, "The

production of the owner's duplicate certificate whenever any voluntary instrument ispresented for registration shall be conclusive authority from the registered owner to theregister of deeds to enter a new certificate or to make a memorandum of registration inaccordance with such instrument, and the new certificate or memorandum "shall bebinding upon the registered owner and upon all persons claiming under him, in favor ofevery purchaser for value and in good faith ..." (section 55, par. 2). The schedule offees to be paid upon such registration is likewise therein set forth (section 114, sub-section C, as amended by Republic Act 928). In addition, Republic Act 456 alsorequires that "No voluntary document by which real property or an interest therein issold, transferred, assigned, mortgaged or leased shall be registered in the registry of

property, unless the real estate taxes levied and actually due thereon shall have beenfully paid" (section 1); and, that "Every document of transfer or alienation of realproperty filed with the Register of Deeds shall be accompanied with an extra copy ofthe same which copy shall be transmitted by said officer to the city or provincialassessor ... (section 2). As it thus results, the Legislature appears to have specified theminimum requirements for the registration of conveyances of real property. Uponsatisfaction of the said requirements, it becomes the legal duty of the registrar to makethe registration requested. No entity, it seems clear enough, except the Legislatureitself, may add to or detract from or otherwise alter or amend the requirements it has

so enumerated — and then only by the corresponding amendment of the existingstatutes or the enactment of new ones.

In this posture, to sanction the condition to registration imposed by the ordinance underexamination would virtually allow the appellant municipal board to add newrequirements for registration not otherwise provided by applicable statutory law on thematter. In effect, it gives power to the said appellant to amend or modify the law — apower which, definitely, is not vested in it. We therefore conclude that the conditionthus imposed by the ordinance in question is ultra vires . Considering that this portion is



severable from the rest of the provisions thereof without affecting the integrity of theremaining portions as a complete set of provisions on the matter standing bythemselves, the same may properly be nullified while the rest of the ordinance nototherwise infirm may be sustained. In passing, it should be understood that to theextent that this rule conflicts with that laid down in C. N. Hodges vs. The MunicipalBoard of the City of Iloilo, G.R. No. L-18129, January 31, 1963, the latter must betaken to be pro tanto so qualified.

Accordingly, the judgment a quo is hereby modified in the sense that Ordinance 31,series of 1960, of the City of Iloilo, is declared valid as being within the corporatepowers of the said City to adopt, with the exception of the portion thereof whichprescribes payment of the tax therein levied as a requirement for the transfer ofownership and the registration of the sale in the office of the Register of Deeds, inreference to which the judgment appealed from is hereby affirmed. No costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.

LUNG CENTER OF THE PHILIPPINES, petitioner,vs.QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor ofQuezon City,respondents.

D E C I S I O N

CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court, asamended, of the Decision1 dated July 17, 2000 of the Court of Appeals in CA-G.R. SPNo. 57014 which affirmed the decision of the Central Board of Assessment Appealsholding that the lot owned by the petitioner and its hospital building constructedthereon are subject to assessment for purposes of real property tax.

The Antecedents

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity

established on January 16, 1981 by virtue of Presidential Decree No. 1823.2

It is theregistered owner of a parcel of land, particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner Elliptical Road, Central District,Quezon City. The lot has an area of 121,463 square meters and is covered by TransferCertificate of Title (TCT) No. 261320 of the Registry of Deeds of Quezon City. Erectedin the middle of the aforesaid lot is a hospital known as the Lung Center of thePhilippines. A big space at the ground floor is being leased to private parties, forcanteen and small store spaces, and to medical or professional practitioners who usethe same as their private clinics for their patients whom they charge for their



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 institutionis not altered by the fact that it admits paying patients and renders medical services tothem, leases portions of the land to private parties, and rents out portions of thehospital to private medical practitioners from which it derives income to be used foroperational 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 itreceives subsidies from the government attests to its character as a charitableinstitution. It contends that the "exclusivity" required in the Constitution does notnecessarily mean "solely." Hence, even if a portion of its real estate is leased out toprivate individuals from whom it derives income, it does not lose its character as acharitable institution, and its exemption from the payment of real estate taxes on itsreal property. The petitioner cited our ruling in Herrera v. QC-BAA9 to bolster its pose.The petitioner further contends that even if P.D. No. 1823 does not exempt it from thepayment of real estate taxes, it is not precluded from seeking tax exemption under the

1987 Constitution.

In their comment on the petition, the respondents aver that the petitioner is not acharitable entity. The petitioner’s real property is not exempt from the payment of realestate taxes under P.D. No. 1823 and even under the 1987 Constitution because itfailed 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 anewspaper report, it appears that graft charges were filed with the Sandiganbayanagainst the director of the petitioner, its administrative officer, and Zenaida Rivera, theproprietress 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 amonth, when the monthly rental should beP357,000 a month as determined by theCommission on Audit; and that instead of complying with the directive of the COA forthe cancellation of the contract for being grossly prejudicial to the government, thepetitioner 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 forcharity patients and uses the rest of its income from the property for the benefit ofpaying patients, among other purposes. They aver that the petitioner failed to adducesubstantial 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 itsrecord 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 asdeposit. That even if a patient is living below the poverty line, he is charged withhigh hospital bills. And, without these bills being first settled, the poor patientcannot be allowed to leave the hospital or be discharged without first paying thehospital bills or issue a promissory note guaranteed and indorsed by an



influential agency or person known only to the Center; that even the remains ofdeceased poor patients suffered the same fate. Moreover, before a patient isadmitted for treatment as free or charity patient, one must undergo a series ofinterviews and must submit all the requirements needed by the Center, usuallyaccompanied by endorsement by an influential agency or person known only tothe Center. These facts were heard and admitted by the Petitioner LCP duringthe hearings before the Honorable QC-BAA and Honorable CBAA. These are the

reasons of indigent patients, instead of seeking treatment with the Center, theyprefer to be treated at the Quezon Institute. Can such practice by the Center becalled charitable?10

The Issues

The issues for resolution are the following: (a) whether the petitioner is a charitableinstitution within the context of Presidential Decree No. 1823 and the 1973 and 1987Constitutions and Section 234(b) of Republic Act No. 7160; and (b) whether the realproperties of the petitioner are exempt from real property taxes.

The Court’s Ruling

The petition is partially granted.

On the first issue, we hold that the petitioner is a charitable institution within the contextof the 1973 and 1987 Constitutions. To determine whether an enterprise is a charitableinstitution/entity or not, the elements which should be considered include the statutecreating the enterprise, its corporate purposes, its constitution and by-laws, the

methods of administration, the nature of the actual work performed, the character ofthe services rendered, the indefiniteness of the beneficiaries, and the use andoccupation of the properties.11

In the legal sense, a charity may be fully defined as a gift, to be applied consistentlywith existing laws, for the benefit of an indefinite number of persons, either by bringingtheir minds and hearts under the influence of education or religion, by assisting them toestablish themselves in life or otherwise lessening the burden of government.12 It maybe applied to almost anything that tend to promote the well-doing and well-being ofsocial man. It embraces the improvement and promotion of the happiness of

man.13 The word "charitable" is not restricted to relief of the poor or sick.14 The test of acharity and a charitable organization are in law the same. The test whether anenterprise is charitable or not is whether it exists to carry out a purpose reorganized inlaw as charitable or whether it is maintained for gain, profit, or private advantage.

Under P.D. No. 1823, 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 thePresident of the Philippines with the Ministry of Health and the Ministry of HumanSettlements. It was organized for the welfare and benefit of the Filipino people



3. To stimulate and, whenever possible, underwrite scientific researches onthe biological, demographic, social, economic, eugenic and physiologicalaspects of lung or pulmonary diseases and their control; and to collect andpublish the findings of such research for public consumption;

4. To facilitate the dissemination of ideas and public acceptance ofinformation on lung consciousness or awareness, and the development of

fact-finding, information and reporting facilities for and in aid of the generalpurposes or objects aforesaid, especially in human lung requirements,general health and physical fitness, and other relevant or related fields;

5. To encourage the training of physicians, nurses, health officers, socialworkers and medical and technical personnel in the practical and scientificimplementation of services to lung patients;

6. To assist universities and research institutions in their studies about lungdiseases, to encourage advanced training in matters of the lung and relatedfields and to support educational programs of value to general health;

7. To encourage the formation of other organizations on the national,provincial and/or city and local levels; and to coordinate their various effortsand activities for the purpose of achieving a more effective programmaticapproach on the common problems relative to the objectives enumeratedherein;

8. To seek and obtain assistance in any form from both international and

local foundations and organizations; and to administer grants and fundsthat may be given to the organization;

9. To extend, whenever possible and expedient, medical services to thepublic and, in general, to promote and protect the health of the masses ofour people, which has long been recognized as an economic asset and asocial blessing;

10. To help prevent, relieve and alleviate the lung or pulmonary afflictionsand maladies of the people in any and all walks of life, including those who

are poor and needy, all without regard to or discrimination, because ofrace, creed, color or political belief of the persons helped; and to enablethem to obtain treatment when such disorders occur;

11. To participate, as circumstances may warrant, in any activity designedand carried on to promote the general health of the community;

12. To acquire and/or borrow funds and to own all funds or equipment,educational materials and supplies by purchase, donation, or otherwise and



persuaded to enter an asylum of any kind confined to the reception of objects ofcharity; and that their honest pride is much less wounded by being placed in aninstitution in which paying patients are also received. The fact of receiving moneyfrom some of the patients does not, we think, at all impair the character of thecharity, so long as the money thus received is devoted altogether to thecharitable object which the institution is intended to further.22

The money received by the petitioner becomes a part of the trust fund and must bedevoted to public trust purposes and cannot be diverted to private profit or benefit.23

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner doesnot lose its character as a charitable institution simply because the gift or donation is inthe form of subsidies granted by the government. As held by the State Supreme Courtof Utah in Yorgason v. County Board of Equalization of Salt Lake County :24

Second, the … government subsidy payments are provided to the project. Thus,those payments are like a gift or donation of any other kind except they comefrom the government. In both Intermountain Health Care and the present case,the crux is the presence or absence of material reciprocity. It is entirely irrelevantto this analysis that the government, rather than a private benefactor, chose tomake up the deficit resulting from the exchange between St. Mark’s Tower andthe tenants by making a contribution to the landlord, just as it would have beenirrelevant in Intermountain Health Care if the patients’ income supplements hadcome from private individuals rather than the government.

Therefore, the fact that subsidization of part of the cost of furnishing such

housing is by the government rather than private charitable contributions doesnot dictate the denial of a charitable exemption if the facts otherwise supportsuch an exemption, as they do here.25

In this case, the petitioner adduced substantial evidence that it spent its income,including the subsidies from the government for 1991 and 1992 for its patients and forthe operation of the hospital. It even incurred a net loss in 1991 and 1992 from itsoperations.

Even as we find that the petitioner is a charitable institution, we hold, anent the second

issue, that those portions of its real property that are leased to private entities are notexempt from real property taxes as these are not actually, directly and exclusively usedfor charitable purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax areconstrued strictissimi juris against the taxpayer and liberally in favor of the taxingpower. Taxation is the rule and exemption is the exception. The effect of an exemptionis 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.26 Asheld in Salvation Army v. Hoehn :27

An intention on the part of the legislature to grant an exemption from the taxingpower of the state will never be implied from language which will admit of anyother reasonable construction. Such an intention must be expressed in clear andunmistakable terms, or must appear by necessary implication from the language

used, for it is a well settled principle that, when a special privilege or exemption isclaimed under a statute, charter or act of incorporation, it is to be construedstrictly against the property owner and in favor of the public. This principleapplies with peculiar force to a claim of exemption from taxation . …28

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specificallyprovides that the petitioner shall enjoy the tax exemptions and privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stockcorporation organized primarily to help combat the high incidence of lung andpulmonary diseases in the Philippines, all donations, contributions, endowmentsand equipment and supplies to be imported by authorized entities or persons andby the Board of Trustees of the Lung Center of the Philippines, Inc., for the actualuse and benefit of the Lung Center, shall be exempt from income and gift taxes,the same further deductible in full for the purpose of determining the maximumdeductible amount under Section 30, paragraph (h), of the National InternalRevenue Code, as amended.

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 orinstrumentality thereof with respect to equipment purchases made by, or for theLung Center.29

It is plain as day that under the decree, the petitioner does not enjoy any property taxexemption privileges for its real properties as well as the building constructed thereon.If the intentions were otherwise, the same should have been among the enumerationof tax exempt privileges under Section 2:

It is a settled rule of statutory construction that the express mention of one

person, thing, or consequence implies the exclusion of all others. The rule isexpressed in the familiar maxim, expressio unius est exclusio alterius .

The rule of expressio unius est exclusio alterius is formulated in a number ofways. One variation of the rule is the principle that what is expressed puts an endto that which is implied. Expressium facit cessare tacitum . Thus, where a statute,by its terms, is expressly limited to certain matters, it may not, by interpretation orconstruction, be extended to other matters.



...

The rule of expressio unius est exclusio alterius and its variations are canons ofrestrictive interpretation. They are based on the rules of logic and the naturalworkings of the human mind. They are predicated upon one’s own voluntary actand not upon that of others. They proceed from the premise that the legislaturewould not have made specified enumeration in a statute had the intention been

not to restrict its meaning and confine its terms to those expressly mentioned.30

The exemption must not be so enlarged by construction since the reasonablepresumption is that the State has granted in express terms all it intended to grant at all,and that unless the privilege is limited to the very terms of the statute the favor wouldbe intended beyond what was meant.31

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, andimprovements, actually, directly and exclusively used for religious, charitable oreducational purposes shall be exempt from taxation.32

The tax exemption under this constitutional provision covers property taxes only.33 AsChief Justice Hilario G. Davide, Jr., then a member of the 1986 ConstitutionalCommission, explained: ". . . what is exempted is not the institution itself . . .; thoseexempted from real estate taxes are lands, buildings and improvements actually,directly and exclusively used for religious, charitable or educational purposes."34

Consequently, the constitutional provision is implemented by Section 234(b) ofRepublic Act No. 7160 (otherwise known as the Local Government Code of 1991) asfollows:

SECTION 234. Exemptions from Real Property Tax . – The following areexempted from payment of the real property tax:

...

(b) Charitable institutions, churches, parsonages or convents appurtenantthereto, mosques, non-profit or religious cemeteries and all lands,buildings, and improvements actually, directly, andexclusively used forreligious, charitable or educational purposes.35

We note that under the 1935 Constitution, "... all lands, buildings, and improvementsused ‘exclusively’ for … charitable … purposes shall be exempt fromtaxation."36 However, under the 1973 and the present Constitutions, for "lands,buildings, and improvements" of the charitable institution to be considered exempt, the



same should not only be "exclusively" used for charitable purposes; it is required thatsuch property be used "actually" and "directly" for such purposes.37

In light of the foregoing substantial changes in the Constitution, the petitioner cannotrely on our ruling in Herrera v. Quezon City Board of Assessment Appeals which waspromulgated on September 30, 1961 before the 1973 and 1987 Constitutions tookeffect.38 As this Court held in Province of Abra v. Hernando :39

… Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements usedexclusively for religious, charitable, or educational purposes shall be exempt fromtaxation." The present Constitution added "charitable institutions, mosques, andnon-profit cemeteries" and required that for the exemption of "lands, buildings,and improvements," they should not only be "exclusively" but also "actually" and"directly" used for religious or charitable purposes. The Constitution is wordeddifferently. The change should not be ignored. It must be duly taken intoconsideration. Reliance on past decisions would have sufficed were the words"actually" as well as "directly" not added. There must be proof therefore ofthe actual and direct use of the lands, buildings, and improvements for religiousor charitable purposes to be exempt from taxation. …

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitledto the exemption, the petitioner is burdened to prove, by clear and unequivocal proof,that (a) it is a charitable institution; and (b) its real propertiesare 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."40 If real property is used for one or morecommercial purposes, it is not exclusively used for the exempted purposes but issubject to taxation.41 The words "dominant use" or "principal use" cannot be substitutedfor the words "used exclusively" without doing violence to the Constitutions and thelaw.42 Solely is synonymous with exclusively.43

What is meant by actual, direct and exclusive use of the property for charitablepurposes is the direct and immediate and actual application of the property itself to thepurposes 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.44

The petitioner failed to discharge its burden to prove that the entirety of its real propertyis actually, directly and exclusively used for charitable purposes. While portions of thehospital are used for the treatment of patients and the dispensation of medical servicesto them, whether paying or non-paying, other portions thereof are being leased toprivate individuals for their clinics and a canteen. Further, a portion of the land is beingleased to a private individual for her business enterprise under the business name



"Elliptical Orchids and Garden Center." Indeed, the petitioner’s evidence shows that itcollected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the saidlessees.

Accordingly, we hold that the portions of the land leased to private entities as well asthose parts of the hospital leased to private individuals are not exempt from suchtaxes.45 On the other hand, the portions of the land occupied by the hospital and

portions of the hospital used for its patients, whether paying or non-paying, are exemptfrom real property taxes.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. Therespondent Quezon City Assessor is hereby DIRECTED to determine, after duehearing, the precise portions of the land and the area thereof which are leased toprivate persons, and to compute the real property taxes due thereon as provided for bylaw.

SO ORDERED.

Davide, Jr., Puno, Vitug, Panganiban, Quisumbing, Ynares-Santiago, Sandoval- Gutierrez, Carpio, Austria-Martinez, Corona, Carpio Morales, Azcuna, and Tinga,JJ., concur.

AMERICAN BIBLE SOCIETY, plaintiff-appellant,vs.CITY OF MANILA, defendant-appellee.

City Fiscal Eugenio Angeles and Juan Nabong for appellant.Assistant City Fiscal Arsenio Nañawa for appellee.

FELIX, J.:

Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporationduly registered and doing business in the Philippines through its Philippine agencyestablished in Manila in November, 1898, with its principal office at 636 Isaac Peral insaid City. The defendant appellee is a municipal corporation with powers that are to beexercised in conformity with the provisions of Republic Act No. 409, known as the

Revised Charter of the City of Manila.

In the course of its ministry, plaintiff's Philippine agency has been distributing andselling bibles and/or gospel portions thereof (except during the Japanese occupation)throughout the Philippines and translating the same into several Philippine dialects. OnMay 29 1953, the acting City Treasurer of the City of Manila informed plaintiff that itwas conducting the business of general merchandise since November, 1945, withoutproviding itself with the necessary Mayor's permit and municipal license, in violation ofOrdinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364, and



required plaintiff to secure, within three days, the corresponding permit and licensefees, together with compromise covering the period from the 4th quarter of 1945 to the2nd quarter of 1953, in the total sum of P5,821.45 (Annex A).

Plaintiff protested against this requirement, but the City Treasurer demanded thatplaintiff deposit and pay under protest the sum of P5,891.45, if suit was to be taken incourt regarding the same (Annex B). To avoid the closing of its business as well as

further fines and penalties in the premises on October 24, 1953, plaintiff paid to thedefendant under protest the said permit and license fees in the aforementionedamount, giving at the same time notice to the City Treasurer that suit would be taken incourt to question the legality of the ordinances under which, the said fees were beingcollected (Annex C), which was done on the same date by filing the complaint thatgave rise to this action. In its complaint plaintiff prays that judgment be rendereddeclaring the said Municipal Ordinance No. 3000, as amended, and Ordinances Nos.2529, 3028 and 3364 illegal and unconstitutional, and that the defendant be ordered torefund to the plaintiff the sum of P5,891.45 paid under protest, together with legal

interest thereon, and the costs, plaintiff further praying for such other relief and remedyas the court may deem just equitable.

Defendant answered the complaint, maintaining in turn that said ordinances wereenacted by the Municipal Board of the City of Manila by virtue of the power granted to itby section 2444, subsection (m-2) of the Revised Administrative Code, superseded onJune 18, 1949, by section 18, subsection (1) of Republic Act No. 409, known as theRevised Charter of the City of Manila, and praying that the complaint be dismissed,with costs against plaintiff. This answer was replied by the plaintiff reiterating theunconstitutionality of the often-repeated ordinances.

Before trial the parties submitted the following stipulation of facts:

COME NOW the parties in the above-entitled case, thru their undersignedattorneys and respectfully submit the following stipulation of facts:

1. That the plaintiff sold for the use of the purchasers at its principal office at 636Isaac Peral, Manila, Bibles, New Testaments, bible portions and bibleconcordance in English and other foreign languages imported by it from theUnited States as well as Bibles, New Testaments and bible portions in the local

dialects imported and/or purchased locally; that from the fourth quarter of 1945 tothe first quarter of 1953 inclusive the sales made by the plaintiff were as follows:

Quarter Amount of Sales

4th quarter 1945 P1,244.21

1st quarter 1946 2,206.85



2nd quarter 1946 1,950.38

3rd quarter 1946 2,235.99

4th quarter 1946 3,256.04

1st quarter 1947 13,241.07

2nd quarter 1947 15,774.55

3rd quarter 1947 14,654.13

4th quarter 1947 12,590.94

1st quarter 1948 11,143.90

2nd quarter 1948 14,715.26

3rd quarter 1948 38,333.83

4th quarter 1948 16,179.90

1st quarter 1949 23,975.10

2nd quarter 1949 17,802.08

3rd quarter 1949 16,640.79

4th quarter 1949 15,961.38

1st quarter 1950 18,562.46

2nd quarter 1950 21,816.32

3rd quarter 1950 25,004.55

4th quarter 1950 45,287.92

1st quarter 1951 37,841.21

2nd quarter 1951 29,103.98

3rd quarter 1951 20,181.104th quarter 1951 22,968.91

1st quarter 1952 23,002.65

2nd quarter 1952 17,626.96

3rd quarter 1952 17,921.01

4th quarter 1952 24,180.72



1st quarter 1953 29,516.21

2. That the parties hereby reserve the right to present evidence of other facts notherein stipulated.

WHEREFORE, it is respectfully prayed that this case be set for hearing so that

the parties may present further evidence on their behalf. (Record on Appeal, pp.15-16).

When the case was set for hearing, plaintiff proved, among other things, that it hasbeen in existence in the Philippines since 1899, and that its parent society is in NewYork, United States of America; that its, contiguous real properties located at IsaacPeral are exempt from real estate taxes; and that it was never required to pay anymunicipal license fee or tax before the war, nor does the American Bible Society in theUnited States pay any license fee or sales tax for the sale of bible therein. Plaintifffurther tried to establish that it never made any profit from the sale of its bibles, which

are disposed of for as low as one third of the cost, and that in order to maintain itsoperating cost it obtains substantial remittances from its New York office and voluntarycontributions and gifts from certain churches, both in the United States and in thePhilippines, which are interested in its missionary work. Regarding plaintiff's contentionof lack of profit in the sale of bibles, defendant retorts that the admissions of plaintiff-appellant's lone witness who testified on cross-examination that bibles bearing theprice of 70 cents each from plaintiff-appellant's New York office are sold here byplaintiff-appellant at P1.30 each; those bearing the price of $4.50 each are sold here atP10 each; those bearing the price of $7 each are sold here at P15 each; and those

bearing the price of $11 each are sold here at P22 each, clearly show that plaintiff'scontention that it never makes any profit from the sale of its bible, is evidentlyuntenable.

After hearing the Court rendered judgment, the last part of which is as follows:

As may be seen from the repealed section (m-2) of the Revised AdministrativeCode and the repealing portions (o) of section 18 of Republic Act No. 409,although they seemingly differ in the way the legislative intent is expressed, yettheir meaning is practically the same for the purpose of taxing the merchandise

mentioned in said legal provisions, and that the taxes to be levied by saidordinances is in the nature of percentage graduated taxes (Sec. 3 of OrdinanceNo. 3000, as amended, and Sec. 1, Group 2, of Ordinance No. 2529, asamended by Ordinance No. 3364).

IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court is of the opinionand so holds that this case should be dismissed, as it is hereby dismissed, forlack of merits, with costs against the plaintiff.



Not satisfied with this verdict plaintiff took up the matter to the Court of Appeals whichcertified the case to Us for the reason that the errors assigned to the lower Courtinvolved only questions of law.

Appellant contends that the lower Court erred:

1. In holding that Ordinances Nos. 2529 and 3000, as respectively amended, are

not unconstitutional;

2. In holding that subsection m-2 of Section 2444 of the Revised AdministrativeCode under which Ordinances Nos. 2592 and 3000 were promulgated, was notrepealed by Section 18 of Republic Act No. 409;

3. In not holding that an ordinance providing for taxes based on gross sales orreceipts, in order to be valid under the new Charter of the City of Manila, mustfirst be approved by the President of the Philippines; and

4. In holding that, as the sales made by the plaintiff-appellant have assumedcommercial proportions, it cannot escape from the operation of said municipalordinances under the cloak of religious privilege.

The issues . — As may be seen from the proceeding statement of the case, the issuesinvolved in the present controversy may be reduced to the following: (1) whether or notthe ordinances of the City of Manila, Nos. 3000, as amended, and 2529, 3028 and3364, are constitutional and valid; and (2) whether the provisions of said ordinancesare applicable or not to the case at bar.

Section 1, subsection (7) of Article III of the Constitution of the Republic of thePhilippines, provides that:

(7) No law shall be made respecting an establishment of religion, or prohibitingthe free exercise thereof, and the free exercise and enjoyment of religiousprofession and worship, without discrimination or preference, shall forever beallowed. No religion test shall be required for the exercise of civil or politicalrights.

Predicated on this constitutional mandate, plaintiff-appellant contends that OrdinancesNos. 2529 and 3000, as respectively amended, are unconstitutional and illegal in so faras its society is concerned, because they provide for religious censorship and restrainthe free exercise and enjoyment of its religious profession, to wit: the distribution andsale of bibles and other religious literature to the people of the Philippines.

Before entering into a discussion of the constitutional aspect of the case, We shall firstconsider the provisions of the questioned ordinances in relation to their application tothe sale of bibles, etc. by appellant. The records, show that by letter of May 29, 1953(Annex A), the City Treasurer required plaintiff to secure a Mayor's permit in



connection with the society's alleged business of distributing and selling bibles, etc.and to pay permit dues in the sum of P35 for the period covered in this litigation, plusthe sum of P35 for compromise on account of plaintiff's failure to secure the permitrequired by Ordinance No. 3000 of the City of Manila, as amended. This Ordinance isof general application and not particularly directed against institutions like the plaintiff,and it does not contain any provisions whatever prescribing religious censorship norrestraining the free exercise and enjoyment of any religious profession. Section 1 of

Ordinance No. 3000 reads as follows:

SEC. 1. PERMITS NECESSARY. — It shall be unlawful for any person or entityto conduct or engage in any of the businesses, trades, oroccupations enumerated in Section 3 of this Ordinance or other businesses,trades, or occupations for which a permit is required for the proper supervision and enforcement of existing laws and ordinances governing the sanitation,security, and welfare of the public and the health of the employees engaged in the business specified in said section 3 hereof, WITHOUT FIRST HAVING

OBTAINED A PERMIT THEREFOR FROM THE MAYOR AND THENECESSARY LICENSE FROM THE CITY TREASURER.

The business, trade or occupation of the plaintiff involved in this case is not particularlymentioned in Section 3 of the Ordinance, and the record does not show that a permit isrequired therefor under existing laws and ordinances for the proper supervision andenforcement of their provisions governing the sanitation, security and welfare of thepublic and the health of the employees engaged in the business of the plaintiff.However, sections 3 of Ordinance 3000 contains item No. 79, which reads as follows:

79. All other businesses, trades or occupations notmentioned in this Ordinance, except those upon which theCity is not empowered to license or to tax P5.00

Therefore, the necessity of the permit is made to depend upon the power of the City tolicense or tax said business, trade or occupation.

As to the license fees that the Treasurer of the City of Manila required the society topay from the 4th quarter of 1945 to the 1st quarter of 1953 in the sum of P5,821.45,including the sum of P50 as compromise, Ordinance No. 2529, as amended by

Ordinances Nos. 2779, 2821 and 3028 prescribes the following:

SEC. 1. FEES. — Subject to the provisions of section 578 of the RevisedOrdinances of the City of Manila, as amended, there shall be paid to the CityTreasurer for engaging in any of the businesses or occupations belowenumerated, quarterly, license fees based on gross sales or receipts realizedduring the preceding quarter in accordance with the rates herein prescribed:PROVIDED, HOWEVER, That a person engaged in any businesses oroccupation for the first time shall pay the initial license fee based on the probable



was expressed, yet their meaning is practically the same for the purpose of taxing themerchandise mentioned in both legal provisions and, consequently, Ordinances Nos.2529 and 3000, as amended, are to be considered as still in full force and effectuninterruptedly up to the present.

Often the legislature, instead of simply amending the pre-existing statute, willrepeal the old statute in its entirety and by the same enactment re-enact all or

certain portions of the preexisting law. Of course, the problem created by this sortof legislative action involves mainly the effect of the repeal upon rights andliabilities which accrued under the original statute. Are those rights and liabilitiesdestroyed or preserved? The authorities are divided as to the effect ofsimultaneous repeals and re-enactments. Some adhere to the view that therights and liabilities accrued under the repealed act are destroyed, since thestatutes from which they sprang are actually terminated, even though for only avery short period of time. Others, and they seem to be in the majority, refuse to accept this view of the situation, and consequently maintain that all rights an

liabilities which have accrued under the original statute are preserved and may be enforced, since the re-enactment neutralizes the repeal, therefore, continuing the law in force without interruption . (Crawford-Statutory Construction, Sec. 322).

Appellant's counsel states that section 18 (o ) of Republic Act No, 409 introduces a newand wider concept of taxation and is different from the provisions of Section 2444(m-2)that the former cannot be considered as a substantial re-enactment of the provisions ofthe latter. We have quoted above the provisions of section 2444(m-2) of the RevisedAdministrative Code and We shall now copy hereunder the provisions of Section 18,subdivision (o ) of Republic Act No. 409, which reads as follows:

(o ) To tax and fix the license fee on dealers in general merchandise, includingimporters and indentors, except those dealers who may be expressly subject tothe payment of some other municipal tax under the provisions of this section.

Dealers in general merchandise shall be classified as (a ) wholesale dealers and(b ) retail dealers. For purposes of the tax on retail dealers, general merchandiseshall be classified into four main classes: namely (1) luxury articles, (2) semi-luxury articles, (3) essential commodities, and (4) miscellaneous articles. Aseparate license shall be prescribed for each class but where commodities of

different classes are sold in the same establishment, it shall not be compulsoryfor the owner to secure more than one license if he pays the higher or highestrate of tax prescribed by ordinance. Wholesale dealers shall pay the license taxas such, as may be provided by ordinance.

For purposes of this section, the term "General merchandise" shall includepoultry and livestock, agricultural products, fish and other allied products.



The only essential difference that We find between these two provisions that may haveany bearing on the case at bar, is that, while subsection (m-2) prescribes that thecombined total tax of any dealer or manufacturer, or both, enumerated undersubsections (m-1) and (m-2), whether dealing in one or all of the articles mentionedtherein,shall not be in excess of P500 per annum , the corresponding section 18,subsection (o) of Republic Act No. 409, does not contain any limitation as to theamount of tax or license fee that the retail dealer has to pay per annum. Hence, and in

accordance with the weight of the authorities above referred to that maintain that "allrights and liabilities which have accrued under the original statute are preserved andmay be enforced, since the reenactment neutralizes the repeal, therefore continuingthe law in force without interruption", We hold that the questioned ordinances of theCity of Manila are still in force and effect.

Plaintiff, however, argues that the questioned ordinances, to be valid, must first beapproved by the President of the Philippines as per section 18, subsection (ii ) ofRepublic Act No. 409, which reads as follows:

(ii ) To tax, license and regulate any business, trade or occupation beingconducted within the City of Manila,not otherwise enumerated in the preceding subsections, including percentage taxes based on gross sales or receipts,subject to the approval of the PRESIDENT, except amusement taxes .

but this requirement of the President's approval was not contained in section 2444 ofthe former Charter of the City of Manila under which Ordinance No. 2529 waspromulgated. Anyway, as stated by appellee's counsel, the business of "retail dealersin general merchandise" is expressly enumerated in subsection (o ), section 18 of

Republic Act No. 409; hence, an ordinance prescribing a municipal tax on saidbusiness does not have to be approved by the President to be effective, as it is notamong those referred to in said subsection (ii ). Moreover, the questioned ordinancesare still in force, having been promulgated by the Municipal Board of the City of Manilaunder the authority granted to it by law.

The question that now remains to be determined is whether said ordinances areinapplicable, invalid or unconstitutional if applied to the alleged business of distributionand sale of bibles to the people of the Philippines by a religious corporation like theAmerican Bible Society, plaintiff herein.

With regard to Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and3028, appellant contends that it is unconstitutional and illegal because it restrains thefree exercise and enjoyment of the religious profession and worship of appellant.

Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted,guarantees the freedom of religious profession and worship. "Religion has beenspoken of as a profession of faith to an active power that binds and elevates man to itsCreator" (Aglipay vs . Ruiz, 64 Phil., 201).It has reference to one's views of his relations



to His Creator and to the obligations they impose of reverence to His being andcharacter, and obedience to His Will (Davis vs . Beason, 133 U.S., 342). Theconstitutional guaranty of the free exercise and enjoyment of religious profession andworship carries with it the right to disseminate religious information. Any restraints ofsuch right can only be justified like other restraints of freedom of expression on thegrounds that there is a clear and present danger of any substantive evil which theState has the right to prevent". (Tañada and Fernando on the Constitution of the

Philippines, Vol. 1, 4th ed., p. 297). In the case at bar the license fee herein involved isimposed upon appellant for its distribution and sale of bibles and other religiousliterature:

In the case of Murdock vs. Pennsylvania , it was held that an ordinance requiringthat a license be obtained before a person could canvass or solicit orders forgoods, paintings, pictures, wares or merchandise cannot be made to apply tomembers of Jehovah's Witnesses who went about from door to door distributingliterature and soliciting people to "purchase" certain religious books and

pamphlets, all published by the Watch Tower Bible & Tract Society. The "price"of the books was twenty-five cents each, the "price" of the pamphlets five centseach. It was shown that in making the solicitations there was a request foradditional "contribution" of twenty-five cents each for the books and five centseach for the pamphlets. Lesser sum were accepted, however, and books wereeven donated in case interested persons were without funds.

On the above facts the Supreme Court held that it could not be said thatpetitioners were engaged in commercial rather than a religious venture. Theiractivities could not be described as embraced in the occupation of selling books

and pamphlets. Then the Court continued:

"We do not mean to say that religious groups and the press are free from allfinancial burdens of government. See Grosjean vs. American Press Co ., 297U.S., 233, 250, 80 L. ed. 660, 668, 56 S. Ct. 444. We have here something quitedifferent, for example, from a tax on the income of one who engages in religiousactivities or a tax on property used or employed in connection with activities. It isone thing to impose a tax on the income or property of a preacher. It is quiteanother to exact a tax from him for the privilege of delivering a sermon. The taximposed by the City of Jeannette is a flat license tax, payment of which is acondition of the exercise of these constitutional privileges. The power to tax theexercise of a privilege is the power to control or suppress its enjoyment. . . .Those who can tax the exercise of this religious practice can make its exerciseso costly as to deprive it of the resources necessary for its maintenance. Thosewho can tax the privilege of engaging in this form of missionary evangelism canclose all its doors to all those who do not have a full purse. Spreading religiousbeliefs in this ancient and honorable manner would thus be denied the needy. . . .



It is contended however that the fact that the license tax can suppress or controlthis activity is unimportant if it does not do so. But that is to disregard the natureof this tax. It is a license tax — a flat tax imposed on the exercise of a privilegegranted by the Bill of Rights . . . The power to impose a license tax on theexercise of these freedom is indeed as potent as the power of censorship whichthis Court has repeatedly struck down. . . . It is not a nominal fee imposed as aregulatory measure to defray the expenses of policing the activities in question. It

is in no way apportioned. It is flat license tax levied and collected as a conditionto the pursuit of activities whose enjoyment is guaranteed by the constitutionalliberties of press and religion and inevitably tends to suppress their exercise.That is almost uniformly recognized as the inherent vice and evil of this flatlicense tax."

Nor could dissemination of religious information be conditioned upon theapproval of an official or manager even if the town were owned by a corporationas held in the case of Marsh vs. State of Alabama (326 U.S. 501), or by the

United States itself as held in the case of Tucker vs. Texas (326 U.S. 517). In theformer case the Supreme Court expressed the opinion that the right to enjoyfreedom of the press and religion occupies a preferred position as against theconstitutional right of property owners.

"When we balance the constitutional rights of owners of property against those ofthe people to enjoy freedom of press and religion, as we must here, we remainmindful of the fact that the latter occupy a preferred position. . . . In our view thecircumstance that the property rights to the premises where the deprivation ofproperty here involved, took place, were held by others than the public, is not

sufficient to justify the State's permitting a corporation to govern a community ofcitizens so as to restrict their fundamental liberties and the enforcement of suchrestraint by the application of a State statute." (Tañada and Fernando on theConstitution of the Philippines, Vol. 1, 4th ed., p. 304-306).

Section 27 of Commonwealth Act No. 466, otherwise known as the National InternalRevenue Code, provides:

SEC. 27. EXEMPTIONS FROM TAX ON CORPORATIONS. — The followingorganizations shall not be taxed under this Title in respect to income received by

them as such —

(e) Corporations or associations organized and operated exclusively for religious ,charitable, . . . or educational purposes, . . .: Provided, however, That the incomeof whatever kind and character from any of its properties, real or personal, orfrom any activity conducted for profit, regardless of the disposition made of suchincome, shall be liable to the tax imposed under this Code;



Appellant's counsel claims that the Collector of Internal Revenue has exempted theplaintiff from this tax and says that such exemption clearly indicates that the act ofdistributing and selling bibles, etc. is purely religious and does not fall under the abovelegal provisions.

It may be true that in the case at bar the price asked for the bibles and other religiouspamphlets was in some instances a little bit higher than the actual cost of the same but

this cannot mean that appellant was engaged in the business or occupation of sellingsaid "merchandise" for profit. For this reason We believe that the provisions of City ofManila Ordinance No. 2529, as amended, cannot be applied to appellant, for in doingso it would impair its free exercise and enjoyment of its religious profession andworship as well as its rights of dissemination of religious beliefs.

With respect to Ordinance No. 3000, as amended, which requires the obtention theMayor's permit before any person can engage in any of the businesses, trades oroccupations enumerated therein, We do not find that it imposes any charge upon theenjoyment of a right granted by the Constitution, nor tax the exercise of religiouspractices. In the case of Coleman vs. City of Griffin , 189 S.E. 427, this point waselucidated as follows:

An ordinance by the City of Griffin, declaring that the practice of distributing eitherby hand or otherwise, circulars, handbooks, advertising, or literature of any kind,whether said articles are being delivered free, or whether same are being soldwithin the city limits of the City of Griffin, without first obtaining written permissionfrom the city manager of the City of Griffin, shall be deemed a nuisance andpunishable as an offense against the City of Griffin, does not deprive defendant

of his constitutional right of the free exercise and enjoyment of religious profession and worship, even though it prohibits him from introducing and carrying out a scheme or purpose which he sees fit to claim as a part of his religious system .

It seems clear, therefore, that Ordinance No. 3000 cannot be consideredunconstitutional, even if applied to plaintiff Society. But as Ordinance No. 2529 of theCity of Manila, as amended, is not applicable to plaintiff-appellant and defendant-appellee is powerless to license or tax the business of plaintiff Society involved hereinfor, as stated before, it would impair plaintiff's right to the free exercise and enjoyment

of its religious profession and worship, as well as its rights of dissemination of religiousbeliefs, We find that Ordinance No. 3000, as amended is also inapplicable to saidbusiness, trade or occupation of the plaintiff.

Wherefore, and on the strength of the foregoing considerations, We hereby reverse thedecision appealed from, sentencing defendant return to plaintiff the sum of P5,891.45unduly collected from it. Without pronouncement as to costs. It is so ordered.



Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion and Endencia,JJ., concur.

III Constitutional Limitations Cases

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Transcript of III Constitutional Limitations Cases