G.R. No. L-59431 July 25, 1984 1.
1. It is manifest that the field of state activity has assumed a much wider scope, The reason
ANTERO M. SISON, JR., petitioner, vs. RUBEN B. ANCHETA, Acting Commissioner, Bureau
of Internal Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue;
TOMAS TOLEDO 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 a
showing of its constitutional infirmity. The assailed provision further amends Section 21 of
the National Internal Revenue Code of 1977, which provides for rates of tax on citizens 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 any other monetary benefit
from deposit substitutes and from trust fund and similar arrangements, (e) dividends and
share of individual partner in the net profits of taxable partnership, (f) adjusted gross
income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "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-à-vis those which are imposed upon fixed income or
salaried individual taxpayers. 4 He characterizes the above sction as arbitrary amounting to
class legislation, oppressive and capricious in character 5 For petitioner, therefore, there is a
transgression of both the equal protection and due process clauses 6 of the Constitution as
well as of the rule requiring uniformity in taxation. 7
The Court, in a resolution of January 26, 1982, required respondents to file an answer within
10 days from notice. Such an answer, after two extensions were granted the Office of the
Solicitor General, was filed on May 28, 1982. 8The facts as alleged were admitted but not the
allegations which to their mind are "mere arguments, opinions or conclusions 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 cited while correctly quoted or paraghraph
do not support petitioner's stand." 10 The prayer is for the dismissal of the petition for lack
of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
was so clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be
left to private enterprise and initiative and which the government was called upon to enter
optionally, and only 'because it was better equipped to administer for the public welfare
than is any private individual or group of individuals,' continue to lose their well-defined
boundaries and to be absorbed within activities that the government must undertake in its
sovereign capacity if it is to meet the increasing social challenges of the times." 11 Hence
the need for more revenues. The power to tax, an inherent prerogative, has to be availed of
to assure the performance of vital state 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 certain availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of
sovereignty. It is the strongest of all the powers of of government." 13 It is, of course, to be
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 does properly rights, both
the due process and equal protection clauses inay properly be invoked, all petitioner does,
to invalidate in appropriate cases a revenue measure. if it were 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 remark characterized it as "a flourish of rhetoric
[attributable to] the intellectual fashion of the times following] a free use of
absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a
constitutional mandate. Justice Frankfurter could rightfully conclude: "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 to destroy 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 law overrides
any legislative or executive, act that runs counter to it. In any case therefore where it can be
demonstrated that the challenged statutory provision — as petitioner here alleges — fails to
abide by its command, then this Court must so declare and adjudge 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 on compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere
allegation, as here. does not suffice. There must be a factual foundation of such
unconstitutional taint. Considering that petitioner here would condemn such a provision as
1
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 are invoked, considering
that they arc not fixed rules but rather broad standards, there is a need for of such
persuasive character as would lead to such a conclusion. Absent such a showing, the
presumption of validity must prevail. 18
5. It is undoubted that the due process clause may be invoked where a taxing statute is so
arbitrary that it finds no support in the Constitution. An obvious example is where it can be
shown to amount to the confiscation of property. That would be a clear abuse of power. It
then becomes the duty of this Court to say that such an arbitrary act amounted to the
exercise of an authority not conferred. That properly calls for the application of the Holmes
dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction
of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and
unreasonable, it is subject to attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is a
denial of this constitutional mandate whether the assailed act is in the exercise of the lice
power or the power of eminent domain is to demonstrated that the governmental act
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 no support in reason. It
suffices then that the laws operate equally and uniformly on all persons under similar
circumstances or that all persons must be treated in the same manner, the conditions not
being different, both in the privileges conferred and the liabilities imposed. Favoritism and
undue preference cannot be allowed. For the principle is that equal protection and security
shall be given to every person under circumstances which if not Identical are analogous. If
law be looked upon in terms of burden 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 That same 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 benefits being 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 which the
'equal protection' clause aims is not a disembodied equality. The Fourteenth Amendment
enjoins 'the equal protection of the laws,' and laws are not abstract propositions. They do
not relate to abstract units A, B and C, but are expressions of policy arising out of specific
difficulties, address to the attainment of specific ends by the 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." 21 Hence the constant reiteration of the view that
classification if rational in character is allowable. 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 the power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that 'inequalities which result from a singling out of one particular
class for taxation, or exemption infringe no constitutional limitation.'" 23
7. Petitioner likewise invoked the kindred concept of uniformity. According to the
Constitution: "The rule of taxation shag be uniform and equitable." 24 This requirement is
met according to Justice Laurel in Philippine Trust Company v. Yatco,25 decided in 1940,
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 for perfect uniformity
or perfect equality, because this is hardly attainable." 27 The problem of 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 for purposes of taxation, ... . 28 As clarified by
Justice Tuason, where "the differentiation" complained of "conforms to the practical
dictates of justice and equity" it "is not discriminatory 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 that the tax "applies equally to all persons, firms and corporations
placed in similar situation."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 legal objection
to a broader tax base or taxable income by eliminating all deductible items and at the same
time reducing the applicable tax rate. Taxpayers may be classified into different categories.
To repeat, it. is enough that the classification must rest upon substantial distinctions that
make real differences. In the case of the gross income taxation embodied in Batas
Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the income
to the application of generalized rules removing all deductible items for all taxpayers within
the class and fixing a set of reduced tax rates to 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 are e 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 the practice of their calling and businessmen, there is no uniformity
in the costs or expenses necessary to produce their income. It would not be just then to
disregard the disparities by giving all of them zero deduction and indiscriminately impose on
all alike the same tax rates on the basis of gross income. There is ample justification then for
2
the Batasang Pambansa to adopt the gross system of income taxation to compensation
income, while continuing the system of net income taxation as regards professional 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 assailed provision; 31 (2)
the force of controlling doctrines on due process, equal protection, and uniformity in
taxation and (3) the reasonableness of the distinction between compensation and taxable
net income of professionals and businessman certainly not a suspect classification,
WHEREFORE, the petition is dismissed. Costs against petitioner.
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 than those for
net income such circumtance does not necessarily result in lower tax 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 taxes because they claim all sort of
deduction justified or not I vote for dismissal.

3
 G.R. Nos. L-49839-46 April 26, 1991
JOSE B. L. REYES and EDMUNDO A. REYES, petitioners, vs. PEDRO ALMANZOR, VICENTE
ABAD SANTOS, JOSE ROÑO, in their capacities as appointed and Acting Members of the
CENTRAL BOARD OF ASSESSMENT APPEALS; TERESITA H. NOBLEJAS, ROMULO M. DEL
ROSARIO, RAUL C. FLORES, in their capacities as appointed and Acting Members of the
BOARD OF ASSESSMENT APPEALS of Manila; and NICOLAS CATIIL in his capacity as City
Assessor of Manila,respondents.
Barcelona, Perlas, Joven & Academia Law Offices for petitioners.
PARAS, J.:
This is a petition for review on certiorari to reverse the June 10, 1977 decision of the Central
Board of Assessment Appeals1 in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes, Edmundo
Reyes, et al. v. Board of Assessment Appeals of Manila and City Assessor of Manila" which
affirmed the March 29, 1976 decision of the Board of Tax Assessment Appeals2 in BTAA
Cases Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose Reyes, et al. v. City Assessor of Manila" and
"Edmundo Reyes and Milagros Reyes v. City Assessor of Manila" upholding the classification
and assessments made by the City Assessor of Manila.
The facts of the case are as follows:
Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated
in Tondo and Sta. Cruz Districts, City of Manila, which are leased and entirely occupied as
dwelling sites by tenants. Said tenants were paying monthly rentals not exceeding three
hundred pesos (P300.00) in July, 1971. On July 14, 1971, the National Legislature enacted
Republic Act No. 6359 prohibiting for one year from its effectivity, an increase in monthly
rentals of dwelling units or of lands on which another's dwelling is located, where such
rentals do not exceed three hundred pesos (P300.00) a month but allowing an increase in
rent by not more than 10% thereafter. The said Act also suspended paragraph (1) of Article
1673 of the Civil Code for two years from its effectivity thereby disallowing the ejectment of
lessees upon the expiration of the usual legal period of lease. On October 12, 1972,
Presidential Decree No. 20 amended R.A. No. 6359 by making absolute the prohibition to
increase monthly rentals below P300.00 and by indefinitely suspending the aforementioned
provision of the Civil Code, excepting leases with a definite period. Consequently, the
Reyeses, petitioners herein, were precluded from raising the rentals and from ejecting the
tenants. In 1973, respondent City Assessor of Manila re-classified and reassessed the value
of the subject properties based on the schedule of market values duly reviewed by the
Secretary of Finance. The revision, as expected, entailed an increase in the corresponding
tax rates prompting petitioners to file a Memorandum of Disagreement with the Board of
Tax Assessment Appeals. They averred that the reassessments made were "excessive,
unwarranted, inequitable, confiscatory and unconstitutional" considering that the taxes
imposed upon them greatly exceeded the annual income derived from their properties.
They argued that the income approach should have been used in determining the land
values instead of the comparable sales approach which the City Assessor adopted (Rollo, pp.
9-10-A). The Board of Tax Assessment Appeals, however, considered the assessments valid,
holding thus:
WHEREFORE, and considering that the appellants have failed to submit concrete evidence
which could overcome the presumptive regularity of the classification and assessments
appear to be in accordance with the base schedule of market values and of the base
schedule of building unit values, as approved by the Secretary of Finance, the cases should
be, as they are hereby, upheld.
SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).
The Reyeses appealed to the Central Board of Assessment Appeals.1âwphi1 They submitted,
among others, the summary of the yearly rentals to show the income derived from the
properties. Respondent City Assessor, on the other hand, submitted three (3) deeds of sale
showing the different market values of the real property situated in the same vicinity where
the subject properties of petitioners are located. To better appreciate the locational and
physical features of the land, the Board of Hearing Commissioners conducted an ocular
inspection with the presence of two representatives of the City Assessor prior to the healing
of the case. Neither the owners nor their authorized representatives were present during
the said ocular inspection despite proper notices served them. It was found that certain
parcels of land were below street level and were affected by the tides (Rollo, pp. 24-25).
On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the
dispositive portion of which reads:
WHEREFORE, the appealed decision insofar as the valuation and assessment of the lots
covered by Tax Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844 and PD-3824 is
affirmed.
For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1) PD-
266, the appealed Decision is modified by allowing a 20% reduction in their respective
market values and applying therein the assessment level of 30% to arrive at the
corresponding assessed value.
SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27)
4
Petitioner's subsequent motion for reconsideration was denied, hence, this petition.
The Reyeses assigned the following error:
THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES APPROACH"
METHOD IN FIXING THE ASSESSED VALUE OF APPELLANTS' PROPERTIES.
The petition is impressed with merit.
The crux of the controversy is in the method used in tax assessment of the properties in
question. Petitioners maintain that the "Income Approach" method would have been more
realistic for in disregarding the effect of the restrictions imposed by P.D. 20 on the market
value of the properties affected, respondent Assessor of the City of Manila unlawfully and
unjustifiably set increased new assessed values at levels so high and successive that the
resulting annual real estate taxes would admittedly exceed the sum total of the yearly
rentals paid or payable by the dweller tenants under P.D. 20. Hence, petitioners protested
against the levels of the values assigned to their properties as revised and increased on the
ground that they were arbitrarily excessive, unwarranted, inequitable, confiscatory and
unconstitutional (Rollo, p. 10-A).
On the other hand, while respondent Board of Tax Assessment Appeals admits in its
decision that the income approach is used in determining land values in some vicinities, it
maintains that when income is affected by some sort of price control, the same is rejected in
the consideration and study of land values as in the case of properties affected by the Rent
Control Law for they do not project the true market value in the open market (Rollo, p. 21).
Thus, respondents opted instead for the "Comparable Sales Approach" on the ground that
the value estimate of the properties predicated upon prices paid in actual, market
transactions would be a uniform and a more credible standards to use especially in case of
mass appraisal of properties (Ibid.). Otherwise stated, public respondents would have this
Court completely ignore the effects of the restrictions of P.D. No. 20 on the market value of
properties within its coverage. In any event, it is unquestionable that both the "Comparable
Sales Approach" and the "Income Approach" are generally acceptable methods of appraisal
for taxation purposes (The Law on Transfer and Business Taxation by Hector S. De Leon,
1988 Edition). However, it is conceded that the propriety of one as against the other would
of course depend on several factors. Hence, as early as 1923 in the case of Army & Navy
Club, Manila v. Wenceslao Trinidad, G.R. No. 19297 (44 Phil. 383), it has been stressed that
the assessors, in finding the value of the property, have to consider all the circumstances
and elements of value and must exercise a prudent discretion in reaching conclusions.
Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation must
not only be uniform, but must also be equitable and progressive.
Uniformity has been defined as that principle by which all taxable articles or kinds of
property of the same class shall be taxed at the same rate (Churchill v. Concepcion, 34 Phil.
969 [1916]).
Notably in the 1935 Constitution, there was no mention of the equitable or progressive
aspects of taxation required in the 1973 Charter (Fernando "The Constitution of the
Philippines", p. 221, Second Edition). Thus, the need to examine closely and determine the
specific mandate of the Constitution.
Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is
progressive when its rate goes up depending on the resources of the person affected (Ibid.).
The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers
of government. But for all its plenitude the power to tax is not unconfined as there are
restrictions. Adversely effecting as it does property rights, both the due process and equal
protection clauses of the Constitution may properly be invoked to invalidate in appropriate
cases a revenue measure. If it were otherwise, there would be truth to the 1903 dictum of
Chief Justice Marshall that "the power to tax involves the power to destroy." The web or
unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr.
Justice Holmes pen, thus: "The power to tax is not the power to destroy while this Court sits.
So it is in the Philippines " (Sison, Jr. v. Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v.
Commissioner of Internal Revenue, 139 SCRA 439 [1985]).
In the same vein, the due process clause may be invoked where a taxing statute is so
arbitrary that it finds no support in the Constitution. An obvious example is where it can be
shown to amount to confiscation of property. That would be a clear abuse of power (Sison v.
Ancheta, supra).
The taxing power has the authority to make a reasonable and natural classification for
purposes of taxation but the government's act must not be prompted by a spirit of hostility,
or at the very least discrimination that finds no support in reason. It suffices then that the
laws operate equally and uniformly on all persons under similar circumstances or that all
persons must be treated in the same manner, the conditions not being different both in the
privileges conferred and the liabilities imposed (Ibid., p. 662).
Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the first
Fundamental Principle to guide the appraisal and assessment of real property for taxation
purposes is that the property must be "appraised at its current and fair market value."
5
By no strength of the imagination can the market value of properties covered by P.D. No. 20
be equated with the market value of properties not so covered. The former has naturally a
much lesser market value in view of the rental restrictions.
Ironically, in the case at bar, not even the factors determinant of the assessed value of
subject properties under the "comparable sales approach" were presented by the public
respondents, namely: (1) that the sale must represent a bonafide arm's length transaction
between a willing seller and a willing buyer and (2) the property must be comparable
property (Rollo, p. 27). Nothing can justify or support their view as it is of judicial notice that
for properties covered by P.D. 20 especially during the time in question, there were hardly
any willing buyers. As a general rule, there were no takers so that there can be no
reasonable basis for the conclusion that these properties were comparable with other
residential properties not burdened by P.D. 20. Neither can the given circumstances be
nonchalantly dismissed by public respondents as imposed under distressed conditions
clearly implying that the same were merely temporary in character. At this point in time, the
falsity of such premises cannot be more convincingly demonstrated by the fact that the law
has existed for around twenty (20) years with no end to it in sight.
Verily, taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. However, such collection should be made in accordance with law as
any arbitrariness will negate the very reason for government itself It is therefore necessary
to reconcile the apparently conflicting interests of the authorities and the taxpayers so that
the real purpose of taxations, which is the promotion of the common good, may be
achieved (Commissioner of Internal Revenue v. Algue Inc., et al., 158 SCRA 9 [1988]).
Consequently, it stands to reason that petitioners who are burdened by the government by
its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice
should not now be penalized by the same government by the imposition of excessive taxes
petitioners can ill afford and eventually result in the forfeiture of their properties.
By the public respondents' own computation the assessment by income approach would
amount to only P10.00 per sq. meter at the time in question.
PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of public
respondents are REVERSED and SET ASIDE; and (e) the respondent Board of Assessment
Appeals of Manila and the City Assessor of Manila are ordered to make a new assessment
by the income approach method to guarantee a fairer and more realistic basis of
computation (Rollo, p. 71).
SO ORDERED.

6
 G.R. No. 148191 November 25, 2003 "For the calendar year 1995, [respondent] seasonably filed its Quarterly Percentage Tax
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SOLIDBANK Returns reflecting gross receipts (pertaining to 5% [Gross Receipts Tax] rate) in the total
CORPORATION, respondent. amount of ₱1,474,691,693.44 with corresponding gross receipts tax payments in the sum of
DECISION ₱73,734,584.60, broken down as follows:
PANGANIBAN, J.: Period Covered Gross Receipts Gross Receipts Tax
Under the Tax Code, the earnings of banks from "passive" income are subject to a twenty January to March 1994 ₱ 188,406,061.95 ₱ 9,420,303.10
percent final withholding tax (20% FWT). This tax is withheld at source and is thus not April to June 1994 370,913,832.70 18,545,691.63
actually and physically received by the banks, because it is paid directly to the government July to September 1994 481,501,838.98 24,075,091.95
by the entities from which the banks derived the income. Apart from the 20% FWT, banks October to December 1994 433,869,959.81 21,693,497.98
are also subject to a five percent gross receipts tax (5% GRT) which is imposed by the Tax Total ₱ 1,474,691,693.44 ₱ 73,734,584.60
Code on their gross receipts, including the "passive" income. "[Respondent] alleges that the total gross receipts in the amount of ₱1,474,691,693.44
Since the 20% FWT is constructively received by the banks and forms part of their gross included the sum of ₱350,807,875.15 representing gross receipts from passive income
receipts or earnings, it follows that it is subject to the 5% GRT. After all, the amount which was already subjected to 20% final withholding tax.
withheld is paid to the government on their behalf, in satisfaction of their withholding taxes. "On January 30, 1996, [the Court of Tax Appeals] rendered a decision in CTA Case No. 4720
That they do not actually receive the amount does not alter the fact that it is remitted for entitled Asian Bank Corporation vs. Commissioner of Internal Revenue[,] wherein it was held
their benefit in satisfaction of their tax obligations. that the 20% final withholding tax on [a] bank’s interest income should not form part of its
Stated otherwise, the fact is that if there were no withholding tax system in place in this taxable gross receipts for purposes of computing the gross receipts tax.
country, this 20 percent portion of the "passive" income of banks would actually be paid to
"On June 19, 1997, on the strength of the aforementioned decision, [respondent] filed with
the banks and then remitted by them to the government in payment of their income tax. the Bureau of Internal Revenue [BIR] a letter-request for the refund or issuance of [a] tax
The institution of the withholding tax system does not alter the fact that the 20 percent credit certificate in the aggregate amount of ₱3,508,078.75, representing allegedly overpaid
portion of their "passive" income constitutes part of their actual earnings, except that it is gross receipts tax for the year 1995, computed as follows:
paid directly to the government on their behalf in satisfaction of the 20 percent final income
tax due on their "passive" incomes. Gross Receipts Subjected to the Final
Tax
The Case
Derived from Passive [Income] ₱ 350,807,875.15
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to annul the Multiply by Final Tax rate 20%
July 18, 2000 Decision2and the May 8, 2001 Resolution3 of the Court of Appeals4 (CA) in CA-
20% Final Tax Withheld at Source ₱ 70,161,575.03
GR SP No. 54599. The decretal portion of the assailed Decision reads as follows:
Multiply by [Gross Receipts Tax] rate 5%
"WHEREFORE, we AFFIRM in toto the assailed decision and resolution of the Court of Tax Overpaid [Gross Receipts Tax] ₱ 3,508,078.75
Appeals."5
"Without waiting for an action from the [petitioner], [respondent] on the same day filed [a]
The challenged Resolution denied petitioner’s Motion for Reconsideration. petition for review [with the Court of Tax Appeals] in order to toll the running of the two-
The Facts year prescriptive period to judicially claim for the refund of [any] overpaid internal revenue
tax[,] pursuant to Section 230 [now 229] of the Tax Code [also ‘National Internal Revenue
Quoting petitioner, the CA6 summarized the facts of this case as follows: Code’] x x x.

7
xxx xxx xxx
"After trial on the merits, the [Court of Tax Appeals], on August 6, 1999, rendered its
decision ordering x x x petitioner to refund in favor of x x x respondent the reduced amount
of ₱1,555,749.65 as overpaid [gross receipts tax] for the year 1995. The legal issue x x x was
resolved by the [Court of Tax Appeals], with Hon. Amancio Q. Saga dissenting, on the
strength of its earlier pronouncement in x x x Asian Bank Corporation vs. Commissioner of
Internal Revenue x x x, wherein it was held that the 20% [final withholding tax] on [a] bank’s
interest income should not form part of its taxable gross receipts for purposes of computing
the [gross receipts tax]."7
Ruling of the CA
The CA held that the 20% FWT on a bank’s interest income did not form part of the taxable
gross receipts in computing the 5% GRT, because the FWT was not actually received by the
bank but was directly remitted to the government. The appellate court curtly said that while
the Tax Code "does not specifically state any exemption, x x x the statute must receive a
sensible construction such as will give effect to the legislative intention, and so as to avoid
an unjust or absurd conclusion."8
Hence, this appeal.9
Issue
Petitioner raises this lone issue for our consideration:
"Whether or not the 20% final withholding tax on [a] bank’s interest income forms part of
the taxable gross receipts in computing the 5% gross receipts tax."10
The Court’s Ruling
The Petition is meritorious.
Sole Issue: Whether the 20% FWT Forms Part of the Taxable Gross Receipts
Petitioner claims that although the 20% FWT on respondent’s interest income was not
actually received by respondent because it was remitted directly to the government, the
fact that the amount redounded to the bank’s benefit makes it part of the taxable gross
receipts in computing the 5% GRT. Respondent, on the other hand, maintains that the CA
correctly ruled otherwise.
We agree with petitioner. In fact, the same issue has been raised recently in China Banking
Corporation v. CA,11where this Court held that the amount of interest income withheld in
payment of the 20% FWT forms part of gross receipts in computing for the GRT on banks.
The FWT and the GRT: Two Different Taxes
The 5% GRT is imposed by Section 11912 of the Tax Code,13 which provides:
"SEC. 119. Tax on banks and non-bank financial intermediaries. – There shall be collected a
tax on gross receipts derived from sources within the Philippines by all banks and non-bank
financial intermediaries in accordance with the following schedule:
"(a) On interest, commissions and discounts from lending activities as well as income from
financial leasing, on the basis of remaining maturities of instruments from which such
receipts are derived.
Short-term maturity not in excess of two (2) years……………………5%
Medium-term maturity – over two (2) years
but not exceeding four (4) years………………………………….…...3%
Long-term maturity:
(i) Over four (4) years but not exceeding
seven (7) years……………………………………………1%
(ii) Over seven (7) years………………………………….….0%
"(b) On dividends……………………………….……..0%
"(c) On royalties, rentals of property, real or personal, profits from exchange and all other
items treated as gross income under Section 2814 of this
Code………....................................................................5%
Provided, however, That in case the maturity period referred to in paragraph (a) is
shortened thru pretermination, then the maturity period shall be reckoned to end as of the
date of pretermination for purposes of classifying the transaction as short, medium or long
term and the correct rate of tax shall be applied accordingly.
"Nothing in this Code shall preclude the Commissioner from imposing the same tax herein
provided on persons performing similar banking activities."
The 5% GRT15 is included under "Title V. Other Percentage Taxes" of the Tax Code and is not
subject to withholding. The banks and non-bank financial intermediaries liable therefor
shall, under Section 125(a)(1),16 file quarterly returns on the amount of gross receipts and
pay the taxes due thereon within twenty (20)17 days after the end of each taxable quarter.
The 20% FWT,18 on the other hand, falls under Section 24(e)(1)19 of "Title II. Tax on Income."
It is a tax on passive income, deducted and withheld at source by the payor-corporation
and/or person as withholding agent pursuant to Section 50,20 and paid in the same manner
and subject to the same conditions as provided for in Section 51.21
8
A perusal of these provisions clearly shows that two types of taxes are involved in the
present controversy: (1) the GRT, which is a percentage tax; and (2) the FWT, which is an
income tax. As a bank, petitioner is covered by both taxes.
A percentage tax is a national tax measured by a certain percentage of the gross selling price
or gross value in money of goods sold, bartered or imported; or of the gross receipts or
earnings derived by any person engaged in the sale of services.22 It is not subject to
withholding.
An income tax, on the other hand, is a national tax imposed on the net or the gross income
realized in a taxable year.23 It is subject to withholding.
In a withholding tax system, the payee is the taxpayer, the person on whom the tax is
imposed; the payor, a separate entity, acts as no more than an agent of the government for
the collection of the tax in order to ensure its payment. Obviously, this amount that is used
to settle the tax liability is deemed sourced from the proceeds constitutive of the tax
base.24 These proceeds are either actual or constructive. Both parties herein agree that
there is no actual receipt by the bank of the amount withheld. What needs to be
determined is if there is constructive receipt thereof. Since the payee -- not the payor -- is
the real taxpayer, the rule on constructive receipt can be easily rationalized, if not made
clearly manifest.25
Constructive Receipt Versus Actual Receipt
Applying Section 7 of Revenue Regulations (RR) No. 17-84,26 petitioner contends that there
is constructive receipt of the interest on deposits and yield on deposit
substitutes.27 Respondent, however, claims that even if there is, it is Section 4(e) of RR 12-
8028 that nevertheless governs the situation.
Section 7 of RR 17-84 states:
"SEC. 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes. –
‘(a) The interest earned on Philippine Currency bank deposits and yield from deposit
substitutes subjected to the withholding taxes in accordance with these regulations need
not be included in the gross income in computing the depositor’s/investor’s income tax
liability in accordance with the provision of Section 29(b),29(c)30 and (d) of the National
Internal Revenue Code, as amended.
‘(b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes
declared for purposes of imposing the withholding taxes in accordance with these
regulations shall be allowed as interest expense deductible for purposes of computing
taxable net income of the payor.
‘(c) If the recipient of the above-mentioned items of income are financial institutions, the
same shall be included as part of the tax base upon which the gross receipt[s] tax is
imposed.’"
Section 4(e) of RR 12-80, on the other hand, states that the tax rates to be imposed on the
gross receipts of banks, non-bank financial intermediaries, financing companies, and other
non-bank financial intermediaries not performing quasi-banking activities shall be based on
all items of income actually received. This provision reads:
"SEC. 4. x x x x x x x x x
"(e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies,
and other non-bank financial intermediaries not performing quasi-banking activities. – The
rates of tax to be imposed on the gross receipts of such financial institutions shall be based
on all items of income actually received. Mere accrual shall not be considered, but once
payment is received on such accrual or in cases of prepayment, then the amount actually
received shall be included in the tax base of such financial institutions, as provided
hereunder x x x."
Respondent argues that the above-quoted provision is plain and clear: since there is no
actual receipt, the FWT is not to be included in the tax base for computing the GRT. There is
supposedly no pecuniary benefit or advantage accruing to the bank from the FWT, because
the income is subjected to a tax burden immediately upon receipt through the withholding
process. Moreover, the earlier RR 12-80 covered matters not falling under the later RR 17-
84.31
We are not persuaded.
By analogy, we apply to the receipt of income the rules on actual and constructive
possession provided in Articles 531 and 532 of our Civil Code.
Under Article 531:32
"Possession is acquired by the material occupation of a thing or the exercise of a right, or by
the fact that it is subject to the action of our will, or by the proper acts and legal formalities
established for acquiring such right."
Article 532 states:
9
"Possession may be acquired by the same person who is to enjoy it, by his legal
representative, by his agent, or by any person without any power whatever; but in the last
case, the possession shall not be considered as acquired until the person in whose name the
act of possession was executed has ratified the same, without prejudice to the juridical
consequences of negotiorum gestio in a proper case."33
The last means of acquiring possession under Article 531 refers to juridical acts -- the
acquisition of possession by sufficient title – to which the law gives the force of acts of
possession.34 Respondent argues that only items of income actually received should be
included in its gross receipts. It claims that since the amount had already been withheld at
source, it did not have actual receipt thereof.
We clarify. Article 531 of the Civil Code clearly provides that the acquisition of the right of
possession is through the proper acts and legal formalities established therefor. The
withholding process is one such act. There may not be actual receipt of the income
withheld; however, as provided for in Article 532, possession by any person without any
power whatsoever shall be considered as acquired when ratified by the person in whose
name the act of possession is executed.
In our withholding tax system, possession is acquired by the payor as the withholding agent
of the government, because the taxpayer ratifies the very act of possession for the
government. There is thus constructive receipt. The processes of bookkeeping and
accounting for interest on deposits and yield on deposit substitutes that are subjected to
FWT are indeed -- for legal purposes -- tantamount to delivery, receipt or
remittance.35 Besides, respondent itself admits that its income is subjected to a tax burden
immediately upon "receipt," although it claims that it derives no pecuniary benefit or
advantage through the withholding process. There being constructive receipt of such
income -- part of which is withheld -- RR 17-84 applies, and that income is included as part
of the tax base upon which the GRT is imposed.
RR 12-80 Superseded by RR 17-84
We now come to the effect of the revenue regulations on interest income constructively
received.
In general, rules and regulations issued by administrative or executive officers pursuant to
the procedure or authority conferred by law upon the administrative agency have the force
and effect, or partake of the nature, of a statute.36The reason is that statutes express the
policies, purposes, objectives, remedies and sanctions intended by the legislature in general
terms. The details and manner of carrying them out are oftentimes left to the administrative
agency entrusted with their enforcement.
In the present case, it is the finance secretary who promulgates the revenue regulations,
upon recommendation of the BIR commissioner. These regulations are the consequences of
a delegated power to issue legal provisions that have the effect of law.37
A revenue regulation is binding on the courts as long as the procedure fixed for its
promulgation is followed. Even if the courts may not be in agreement with its stated policy
or innate wisdom, it is nonetheless valid, provided that its scope is within the statutory
authority or standard granted by the legislature.38 Specifically, the regulation must (1) be
germane to the object and purpose of the law;39 (2) not contradict, but conform to, the
standards the law prescribes;40 and (3) be issued for the sole purpose of carrying into effect
the general provisions of our tax laws.41
In the present case, there is no question about the regularity in the performance of official
duty. What needs to be determined is whether RR 12-80 has been repealed by RR 17-84.
A repeal may be express or implied. It is express when there is a declaration in a regulation -
- usually in its repealing clause -- that another regulation, identified by its number or title, is
repealed. All others are implied repeals.42 An example of the latter is a general provision that
predicates the intended repeal on a substantial conflict between the existing and the prior
regulations.43
As stated in Section 11 of RR 17-84, all regulations, rules, orders or portions thereof that are
inconsistent with the provisions of the said RR are thereby repealed. This declaration
proceeds on the premise that RR 17-84 clearly reveals such an intention on the part of the
Department of Finance. Otherwise, later RRs are to be construed as a continuation of, and
not a substitute for, earlier RRs; and will continue to speak, so far as the subject matter is
the same, from the time of the first promulgation.44
There are two well-settled categories of implied repeals: (1) in case the provisions are in
irreconcilable conflict, the later regulation, to the extent of the conflict, constitutes an
implied repeal of an earlier one; and (2) if the later regulation covers the whole subject of an
earlier one and is clearly intended as a substitute, it will similarly operate as a repeal of the
earlier one.45 There is no implied repeal of an earlier RR by the mere fact that its subject
matter is related to a later RR, which may simply be a cumulation or continuation of the
earlier one.46
Where a part of an earlier regulation embracing the same subject as a later one may not be
enforced without nullifying the pertinent provision of the latter, the earlier regulation is
10
deemed impliedly amended or modified to the extent of the repugnancy.47 The unaffected
provisions or portions of the earlier regulation remain in force, while its omitted portions
are deemed repealed.48 An exception therein that is amended by its subsequent elimination
shall now cease to be so and instead be included within the scope of the general rule.49
Section 4(e) of the earlier RR 12-80 provides that only items of income actually received
shall be included in the tax base for computing the GRT, but Section 7(c) of the later RR 17-
84 makes no such distinction and provides that all interests earned shall be included. The
exception having been eliminated, the clear intent is that the later RR 17-84 includes the
exception within the scope of the general rule.
Repeals by implication are not favored and will not be indulged, unless it is manifest that the
administrative agency intended them. As a regulation is presumed to have been made with
deliberation and full knowledge of all existing rules on the subject, it may reasonably be
concluded that its promulgation was not intended to interfere with or abrogate any earlier
rule relating to the same subject, unless it is either repugnant to or fully inclusive of the
subject matter of an earlier one, or unless the reason for the earlier one is "beyond
peradventure removed."50 Every effort must be exerted to make all regulations stand -- and
a later rule will not operate as a repeal of an earlier one, if by any reasonable construction,
the two can be reconciled.51
RR 12-80 imposes the GRT only on all items of income actually received, as opposed to their
mere accrual, while RR 17-84 includes all interest income in computing the GRT. RR 12-80 is
superseded by the later rule, because Section 4(e) thereof is not restated in RR 17-84.
Clearly therefore, as petitioner correctly states, this particular provision was impliedly
repealed when the later regulations took effect.52
Reconciling the Two Regulations
Granting that the two regulations can be reconciled, respondent’s reliance on Section 4(e)
of RR 12-80 is misplaced and deceptive. The "accrual" referred to therein should not be
equated with the determination of the amount to be used as tax base in computing the GRT.
Such accrual merely refers to an accounting method that recognizes income as earned
although not received, and expenses as incurred although not yet paid.
Accrual should not be confused with the concept of constructive possession or receipt as
earlier discussed. Petitioner correctly points out that income that is merely accrued --
earned, but not yet received -- does not form part of the taxable gross receipts; income that
has been received, albeit constructively, does.53
The word "actually," used confusingly in Section 4(e), will be clearer if removed entirely.
Besides, if actually is that important, accrual should have been eliminated for being a mere
surplusage. The inclusion of accrual stresses the fact that Section 4(e) does not distinguish
between actual and constructive receipt. It merely focuses on the method of accounting
known as the accrual system.
Under this system, income is accrued or earned in the year in which the taxpayer’s right
thereto becomes fixed and definite, even though it may not be actually received until a later
year; while a deduction for a liability is to be accrued or incurred and taken when the
liability becomes fixed and certain, even though it may not be actually paid until later.54
Under any system of accounting, no duty or liability to pay an income tax upon a transaction
arises until the taxable year in which the event constituting the condition precedent
occurs.55 The liability to pay a tax may thus arise at a certain time and the tax paid within
another given time.56
In reconciling these two regulations, the earlier one includes in the tax base for GRT all
income, whether actually or constructively received, while the later one includes specifically
interest income. In computing the income tax liability, the only exception cited in the later
regulations is the exclusion from gross income of interest income, which is already subjected
to withholding. This exception, however, refers to a different tax altogether. To extend
mischievously such exception to the GRT will certainly lead to results not contemplated by
the legislators and the administrative body promulgating the regulations.
Manila Jockey Club Inapplicable
In Commissioner of Internal Revenue v. Manila Jockey Club,57 we held that the term "gross
receipts" shall not include money which, although delivered, has been especially earmarked
by law or regulation for some person other than the taxpayer.58
To begin, we have to nuance the definition of gross receipts59 to determine what it is
exactly. In this regard, we note that US cases have persuasive effect in our jurisdiction,
because Philippine income tax law is patterned after its US counterpart.60
"‘[G]ross receipts’ with respect to any period means the sum of: (a) The total amount
received or accrued during such period from the sale, exchange, or other disposition of x x x
other property of a kind which would properly be included in the inventory of the taxpayer
if on hand at the close of the taxable year, or property held by the taxpayer primarily for
sale to customers in the ordinary course of its trade or business, and (b) The gross income,
attributable to a trade or business, regularly carried on by the taxpayer, received or accrued
during such period x x x."61
11
"x x x [B]y gross earnings from operations x x x was intended all operations xxx including
incidental, subordinate, and subsidiary operations, as well as principal operations."62
"When we speak of the ‘gross earnings’ of a person or corporation, we mean the entire
earnings or receipts of such person or corporation from the business or operations to which
we refer."63
From these cases, "gross receipts"64 refer to the total, as opposed to the net,
income.65 These are therefore the total receipts before any deduction66 for the expenses of
management.67 Webster’s New International Dictionary, in fact, defines gross as "whole or
entire."
Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are
found in many jurisdictions.68 Tax thereon is generally held to be within the power of a state
to impose; or constitutional, unless it interferes with interstate commerce or violates the
requirement as to uniformity of taxation.69
Moreover, we have emphasized that the BIR has consistently ruled that "gross receipts"
does not admit of any deduction.70 Following the principle of legislative approval by
reenactment,71 this interpretation has been adopted by the legislature throughout the
various reenactments of then Section 119 of the Tax Code.72
73
Given that a tax is imposed upon total receipts and not upon net earnings, shall the income
withheld be included in the tax base upon which such tax is imposed? In other words, shall
interest income constructively received still be included in the tax base for computing the
GRT?
We rule in the affirmative.
Manila Jockey Club does not apply to this case. Earmarking is not the same as withholding.
Amounts earmarked do not form part of gross receipts, because, although delivered or
received, these are by law or regulation reserved for some person other than the taxpayer.
On the contrary, amounts withheld form part of gross receipts, because these are in
constructive possession and not subject to any reservation, the withholding agent being
merely a conduit in the collection process.
The Manila Jockey Club had to deliver to the Board on Races, horse owners and jockeys
amounts that never became the property of the race track.74 Unlike these amounts, the
interest income that had been withheld for the government became property of the
financial institutions upon constructive possession thereof. Possession was indeed acquired,
since it was ratified by the financial institutions in whose name the act of possession had
been executed. The money indeed belonged to the taxpayers; merely holding it in trust was
not enough.75
The government subsequently becomes the owner of the money when the financial
institutions pay the FWT to extinguish their obligation to the government. As this Court has
held before, this is the consideration for the transfer of ownership of the FWT from these
institutions to the government.76 It is ownership that determines whether interest income
forms part of taxable gross receipts.77 Being originally owned by these financial institutions
as part of their interest income, the FWT should form part of their taxable gross receipts.
Besides, these amounts withheld are in payment of an income tax liability, which is different
from a percentage tax liability. Commissioner of Internal Revenue v. Tours Specialists, Inc.
aptly held thus:78
"x x x [G]ross receipts subject to tax under the Tax Code do not include monies or receipts
entrusted to the taxpayer which do not belong to them and do not redound to the
taxpayer’s benefit; and it is not necessary that there must be a law or regulation which
would exempt such monies and receipts within the meaning of gross receipts under the Tax
Code."79
In the construction and interpretation of tax statutes and of statutes in general, the primary
consideration is to ascertain and give effect to the intention of the legislature.80 We ought to
impute to the lawmaking body the intent to obey the constitutional mandate, as long as its
enactments fairly admit of such construction.81 In fact, "x x x no tax can be levied without
express authority of law, but the statutes are to receive a reasonable construction with a
view to carrying out their purpose and intent."82
Looking again into Sections 24(e)(1) and 119 of the Tax Code, we find that the first imposes
an income tax; the second, a percentage tax. The legislature clearly intended two different
taxes. The FWT is a tax on passive income, while the GRT is on business.83 The withholding of
one is not equivalent to the payment of the other.
Non-Exemption of FWT from GRT: Neither Unjust nor Absurd
Taxing the people and their property is essential to the very existence of government.
Certainly, one of the highest attributes of sovereignty is the power of taxation,84 which may
legitimately be exercised on the objects to which it is applicable to the utmost extent as the
government may choose.85 Being an incident of sovereignty, such power is coextensive with
that to which it is an incident.86 The interest on deposits and yield on deposit substitutes of
financial institutions, on the one hand, and their business as such, on the other, are the two
12
objects over which the State has chosen to extend its sovereign power. Those not so chosen
are, upon the soundest principles, exempt from taxation.87
While courts will not enlarge by construction the government’s power of taxation,88 neither
will they place upon tax laws so loose a construction as to permit evasions, merely on the
basis of fanciful and insubstantial distinctions.89When the legislature imposes a tax on
income and another on business, the imposition must be respected. The Tax Code should be
so construed, if need be, as to avoid empty declarations or possibilities of crafty tax evasion
schemes. We have consistently ruled thus:
"x x x [I]t is upon taxation that the [g]overnment chiefly relies to obtain the means to carry
on its operations, and it is of the utmost importance that the modes adopted to enforce the
collection of the taxes levied should be summary and interfered with as little as possible. x x
x."90
"Any delay in the proceedings of the officers, upon whom the duty is devolved of collecting
the taxes, may derange the operations of government, and thereby cause serious detriment
to the public."91
"No government could exist if all litigants were permitted to delay the collection of its
taxes."92
A taxing act will be construed, and the intent and meaning of the legislature ascertained,
from its language.93 Its clarity and implied intent must exist to uphold the taxes as against a
taxpayer in whose favor doubts will be resolved.94 No such doubts exist with respect to the
Tax Code, because the income and percentage taxes we have cited earlier have been
imposed in clear and express language for that purpose.95
This Court has steadfastly adhered to the doctrine that its first and fundamental duty is the
application of the law according to its express terms -- construction and interpretation being
called for only when such literal application is impossible or inadequate without them.96 In
Quijano v. Development Bank of the Philippines,97 we stressed as follows:
"No process of interpretation or construction need be resorted to where a provision of law
peremptorily calls for application." 98
A literal application of any part of a statute is to be rejected if it will operate unjustly, lead to
absurd results, or contradict the evident meaning of the statute taken as a whole.99 Unlike
the CA, we find that the literal application of the aforesaid sections of the Tax Code and its
implementing regulations does not operate unjustly or contradict the evident meaning of
the statute taken as a whole. Neither does it lead to absurd results. Indeed, our courts are
not to give words meanings that would lead to absurd or unreasonable consequences.100 We
have repeatedly held thus:
"x x x [S]tatutes should receive a sensible construction, such as will give effect to the
legislative intention and so as to avoid an unjust or an absurd conclusion."101
"While it is true that the contemporaneous construction placed upon a statute by executive
officers whose duty is to enforce it should be given great weight by the courts, still if such
construction is so erroneous, x x x the same must be declared as null and void."102
It does not even matter that the CTA, like in China Banking Corporation,103 relied
erroneously on Manila Jockey Club. Under our tax system, the CTA acts as a highly
specialized body specifically created for the purpose of reviewing tax cases.104 Because of its
recognized expertise, its findings of fact will ordinarily not be reviewed, absent any showing
of gross error or abuse on its part.105 Such findings are binding on the Court and, absent
strong reasons for us to delve into facts, only questions of law are open for
determination.106
Respondent claims that it is entitled to a refund on the basis of excess GRT payments. We
disagree.
Tax refunds are in the nature of tax exemptions.107 Such exemptions are strictly construed
against the taxpayer, being highly disfavored108 and almost said "to be odious to the law."
Hence, those who claim to be exempt from the payment of a particular tax must do so
under clear and unmistakable terms found in the statute. They must be able to point to
some positive provision, not merely a vague implication,109 of the law creating that right.110
The right of taxation will not be surrendered, except in words too plain to be
mistaken.1âwphi1 The reason is that the State cannot strip itself of this highest attribute of
sovereignty -- its most essential power of taxation -- by vague or ambiguous language. Since
tax refunds are in the nature of tax exemptions, these are deemed to be "in derogation of
sovereign authority and to be construed strictissimi juris against the person or entity
claiming the exemption."111
No less than our 1987 Constitution provides for the mechanism for granting tax
exemptions.112 They certainly cannot be granted by implication or mere administrative
regulation. Thus, when an exemption is claimed, it must indubitably be shown to exist, for
every presumption is against it,113 and a well-founded doubt is fatal to the claim.114 In the
instant case, respondent has not been able to satisfactorily show that its FWT on interest
income is exempt from the GRT. Like China Banking Corporation, its argument creates a tax
exemption where none exists.115
13
No exemptions are normally allowed when a GRT is imposed. It is precisely designed to In short, there is no double taxation, because there is no taxing twice, by the same taxing
maintain simplicity in the tax collection effort of the government and to assure its steady authority, within the same jurisdiction, for the same purpose, in different taxing periods,
source of revenue even during an economic slump.116 some of the property in the territory.125 Subjecting interest income to a 20% FWT and
No Double Taxation including it in the computation of the 5% GRT is clearly not double taxation.

We have repeatedly said that the two taxes, subject of this litigation, are different from each WHEREFORE, the Petition is GRANTED. The assailed Decision and Resolution of the Court of
other. The basis of their imposition may be the same, but their natures are different, thus Appeals are hereby REVERSED and SET ASIDE. No costs.
leading us to a final point. Is there double taxation? SO ORDERED.
The Court finds none.
Double taxation means taxing the same property twice when it should be taxed only once;
that is, "x x x taxing the same person twice by the same jurisdiction for the same thing."117 It
is obnoxious when the taxpayer is taxed twice, when it should be but once.118 Otherwise
described as "direct duplicate taxation,"119 the two taxes must be imposed on the same
subject matter, for the same purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period; and they must be of the same kind or
character.120
First, the taxes herein are imposed on two different subject matters. The subject matter of
the FWT is the passive income generated in the form of interest on deposits and yield on
deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the
business of banking.
A tax based on receipts is a tax on business rather than on the property; hence, it is an
excise121 rather than a property tax.122 It is not an income tax, unlike the FWT. In fact, we
have already held that one can be taxed for engaging in business and further taxed
differently for the income derived therefrom.123 Akin to our ruling in Velilla v.
Posadas,124 these two taxes are entirely distinct and are assessed under different provisions.
Second, although both taxes are national in scope because they are imposed by the same
taxing authority -- the national government under the Tax Code -- and operate within the
same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods
they affect are different. The FWT is deducted and withheld as soon as the income is
earned, and is paid after every calendar quarter in which it is earned. On the other hand, the
GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it
is earned.
Third, these two taxes are of different kinds or characters. The FWT is an income tax subject
to withholding, while the GRT is a percentage tax not subject to withholding.

14
 G.R. No. 144104 June 29, 2004
LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and CONSTANTINO P.
ROSAS, in his capacity as City Assessor of Quezon City, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of
the Decision1 dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which
affirmed the decision of the Central Board of Assessment Appeals holding that the lot
owned by the petitioner and its hospital building constructed thereon 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 the registered 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 Transfer Certificate of Title (TCT) No. 261320 of
the Registry of Deeds of Quezon City. Erected in the middle of the aforesaid lot is a hospital
known as the Lung Center of the Philippines. A big space at the ground floor is being leased
to private parties, for canteen and small store spaces, and to medical or professional
practitioners who use the same as their private clinics for their patients whom they charge
for their professional services. Almost one-half of the entire area on the left side of the
building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the
corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a
private enterprise known as the Elliptical Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders medical services to
out-patients, both paying and non-paying. Aside from its income from paying patients, the
petitioner receives annual subsidies from the government.
On June 7, 1993, both the land and the hospital building of the petitioner were assessed for
real property taxes in the amount of ₱4,554,860 by the City Assessor of Quezon
City.3 Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-
A) were issued for the land and the hospital building, respectively.4 On August 25, 1993, the
petitioner filed a Claim for Exemption5 from real property taxes with the City Assessor,
predicated on its claim that it is a charitable institution. The petitioner’s request was denied,
and a petition was, thereafter, filed before the Local Board of Assessment Appeals of
Quezon City (QC-LBAA, for brevity) for the reversal of the resolution of the City Assessor.
The petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the
property is exempt from real property taxes. It averred that a minimum of 60% of its
hospital beds are exclusively used for charity patients and that the major thrust of its
hospital operation is to serve charity patients. The petitioner contends that it is a charitable
institution and, as such, is exempt from real property taxes. The QC-LBAA rendered
judgment dismissing the petition and holding the petitioner liable for real property taxes.6
The QC-LBAA’s decision was, likewise, affirmed on appeal by the Central Board of
Assessment Appeals of Quezon City (CBAA, for brevity)7 which ruled that the petitioner was
not a charitable institution and that its real properties were not actually, directly and
exclusively used for charitable purposes; hence, it was not entitled to real property tax
exemption under the constitution and the law. The petitioner sought relief from the Court
of Appeals, which rendered judgment affirming the decision of the CBAA.8
Undaunted, the petitioner filed its petition in this Court contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO REALTY TAX
EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND IMPROVEMENTS, SUBJECT
OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED FOR
CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER ITS
CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED UPON PROPER
APPLICATION.
The petitioner avers that it is a charitable institution within the context of Section 28(3),
Article VI of the 1987 Constitution. It asserts that its character as a charitable institution is
not altered by the fact that it admits paying patients and renders medical services to them,
leases portions of the land to private parties, and rents out portions of the hospital to
private medical practitioners from which it derives income to be used for operational
expenses. The petitioner points out that for the years 1995 to 1999, 100% of its out-patients
were charity patients and of the hospital’s 282-bed capacity, 60% thereof, or 170 beds, is
allotted to charity patients. It asserts that the fact that it receives subsidies from the
government attests to its character as a charitable institution. It contends that the
"exclusivity" required in the Constitution does not necessarily mean "solely." Hence, even if
a portion of its real estate is leased out to private individuals from whom it derives income,
it does not lose its character as a charitable institution, and its exemption from the payment
of real estate taxes on its real property. The petitioner 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
15
exempt it from the payment 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 a
charitable entity. The petitioner’s real property is not exempt from the payment of real
estate taxes under P.D. No. 1823 and even under the 1987 Constitution because it failed to
prove that it is a charitable institution and that the said property is actually, directly and
exclusively used for charitable purposes. The respondents noted that in a newspaper report,
it appears that graft charges were filed with the Sandiganbayan against the director of the
petitioner, its administrative officer, and Zenaida Rivera, the proprietress of the Elliptical
Orchids and Garden Center, for entering into a lease contract over 7,663.13 square meters
of the property in 1990 for only ₱20,000 a month, when the monthly rental should be
₱357,000 a month as determined by the Commission on Audit; and that instead of
complying with the directive of the COA for the cancellation of the contract for being grossly
prejudicial to the government, the petitioner renewed the same on March 13, 1995 for a
monthly rental of only ₱24,000. They assert that the petitioner uses the subsidies granted
by the government for charity patients and uses the rest of its income from the property for
the benefit of paying patients, among other purposes. They aver that the petitioner failed to
adduce substantial evidence that 100% of its out-patients and 170 beds in the hospital are
reserved for indigent patients. The respondents further assert, thus:
13. That the claims/allegations of the Petitioner LCP do not speak well of its record of
service. That before a patient is admitted for treatment in the Center, first impression is
that it is pay-patient and required to pay a certain amount as deposit. That even if a
patient is living below the poverty line, he is charged with high hospital bills. And, without
these bills being first settled, the poor patient cannot be allowed to leave the hospital or
be discharged without first paying the hospital bills or issue a promissory note guaranteed
and indorsed by an influential agency or person known only to the Center; that even the
remains of deceased poor patients suffered the same fate. Moreover, before a patient is
admitted for treatment as free or charity patient, one must undergo a series of interviews
and must submit all the requirements needed by the Center, usually accompanied by
endorsement by an influential agency or person known only to the Center. These facts
were heard and admitted by the Petitioner LCP during the hearings before the Honorable
QC-BAA and Honorable CBAA. These are the reasons of indigent patients, instead of
seeking treatment with the Center, they prefer to be treated at the Quezon Institute. Can
such practice by the Center be called charitable?10
The Issues
The issues for resolution are the following: (a) whether the petitioner is a charitable
institution within the context of Presidential Decree No. 1823 and the 1973 and 1987
Constitutions and Section 234(b) of Republic Act No. 7160; and (b) whether the real
properties 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 context of
the 1973 and 1987 Constitutions. To determine whether an enterprise is a charitable
institution/entity or not, the elements which should be considered include the statute
creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of
administration, the nature of the actual work performed, the character of the services
rendered, the indefiniteness of the beneficiaries, and the use and occupation of the
properties.11
In the legal sense, a charity may be fully defined as a gift, to be applied consistently with
existing laws, for the benefit of an indefinite number of persons, either by bringing their
minds and hearts under the influence of education or religion, by assisting them to establish
themselves in life or otherwise lessening the burden of government.12 It may be applied to
almost anything that tend to promote the well-doing and well-being of social man. It
embraces the improvement and promotion of the happiness of man.13 The word
"charitable" is not restricted to relief of the poor or sick.14 The test of a charity and a
charitable organization are in law the same. The test whether an enterprise is charitable or
not is whether it exists to carry out a purpose reorganized in law as charitable or whether it
is maintained for gain, profit, or private advantage.
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 the President of the
Philippines with the Ministry of Health and the Ministry of Human Settlements. It was
organized for the welfare and benefit of the Filipino people principally to help combat the
high incidence of lung and pulmonary diseases in the Philippines. The raison d’etre for the
creation of the petitioner is stated in the decree, viz:
Whereas, for decades, respiratory diseases have been a priority concern, having been the
leading cause of illness and death in the Philippines, comprising more than 45% of the
total annual deaths from all causes, thus, exacting a tremendous toll on human resources,
which ailments are likely to increase and degenerate into serious lung diseases on account
16
 of unabated pollution, industrialization and unchecked cigarette smoking in the
country;lavvph!l.net
Whereas, the more common lung diseases are, to a great extent, preventable, and curable
with early and adequate medical care, immunization and through prompt and intensive
prevention and health education programs;
Whereas, there is an urgent need to consolidate and reinforce existing programs,
strategies and efforts at preventing, treating and rehabilitating people affected by lung
diseases, and to undertake research and training on the cure and prevention of lung
diseases, through a Lung Center which will house and nurture the above and related
activities and provide tertiary-level care for more difficult and problematical cases;
Whereas, to achieve this purpose, the Government intends to provide material and
financial support towards the establishment and maintenance of a Lung Center for the
welfare and benefit of the Filipino people.15
The purposes for which the petitioner was created are spelled out in its Articles of
Incorporation, thus:
SECOND: That the purposes for which such corporation is formed are as follows:
1. To construct, establish, equip, maintain, administer and conduct an integrated medical
institution which shall specialize in the treatment, care, rehabilitation and/or relief of lung
and allied diseases in line with the concern of the government to assist and provide
material and financial support in the establishment and maintenance of a lung center
primarily to benefit the people of the Philippines and in pursuance of the policy of the
State to secure the well-being of the people by providing them specialized health and
medical services and by minimizing the incidence of lung diseases in the country and
elsewhere.
2. To promote the noble undertaking of scientific research related to the prevention of
lung or pulmonary ailments and the care of lung patients, including the holding of a series
of relevant congresses, conventions, seminars and conferences;
3. To stimulate and, whenever possible, underwrite scientific researches on the biological,
demographic, social, economic, eugenic and physiological aspects of lung or pulmonary
diseases and their control; and to collect and publish the findings of such research for
public consumption;
4. To facilitate the dissemination of ideas and public acceptance of information on lung
consciousness or awareness, and the development of fact-finding, information and
reporting facilities for and in aid of the general purposes 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, social workers and
medical and technical personnel in the practical and scientific implementation of services
to lung patients;
6. To assist universities and research institutions in their studies about lung diseases, to
encourage advanced training in matters of the lung and related fields 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 efforts and activities for the purpose
of achieving a more effective programmatic approach on the common problems relative
to the objectives enumerated herein;
8. To seek and obtain assistance in any form from both international and local foundations
and organizations; and to administer grants and funds that may be given to the
organization;
9. To extend, whenever possible and expedient, medical services to the public and, in
general, to promote and protect the health of the masses of our people, which has long
been recognized as an economic asset and a social blessing;
10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and 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 of race, creed, color or political belief of the persons
helped; and to enable them to obtain treatment when such disorders occur;
11. To participate, as circumstances may warrant, in any activity designed and 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 to dispose of and
distribute the same in such manner, and, on such basis as the Center shall, from time to
time, deem proper and best, under the particular circumstances, to serve its general and
non-profit purposes and objectives;lavvphil.net
13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of
properties, whether real or personal, for purposes herein mentioned; and
17
 14. To do everything necessary, proper, advisable or convenient for the accomplishment
of any of the powers herein set forth and to do every other act and thing incidental
thereto or connected therewith.16
Hence, the medical services of the petitioner are to be rendered to the public in general in
any and all walks of life including those who are poor and the needy without discrimination.
After all, any person, the rich as well as the poor, may fall sick or be injured or wounded and
become a subject of charity.17
As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether out-
patient, or confined in the hospital, or receives subsidies from the government, so long as
the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or
operating the institution.18 In Congregational Sunday School, etc. v. Board of Review,19 the
State Supreme Court of Illinois held, thus:
… [A]n institution does not lose its charitable character, and consequent exemption from
taxation, by reason of the fact that those recipients of its benefits who are able to pay are
required to do so, where no profit is made by the institution and the amounts so received
are applied in furthering its charitable purposes, and those benefits are refused to none
on account of inability to pay therefor. The fundamental ground upon which all
exemptions in favor of charitable institutions are based is the benefit conferred upon the
public by them, and a consequent relief, to some extent, of the burden upon the state to
care for and advance the interests of its citizens.20
As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association
of South Dakota v. Baker:21
… [T]he fact that paying patients are taken, the profits derived from attendance upon
these patients being exclusively devoted to the maintenance of the charity, seems rather
to enhance the usefulness of the institution to the poor; for it is a matter of common
observation amongst those who have gone about at all amongst the suffering classes, that
the deserving poor can with difficulty be persuaded to enter an asylum of any kind
confined to the reception of objects of charity; and that their honest pride is much less
wounded by being placed in an institution in which paying patients are also received. The
fact of receiving money from some of the patients does not, we think, at all impair the
character of the charity, so long as the money thus received is devoted altogether to the
charitable object which the institution is intended to further.22
The money received by the petitioner becomes a part of the trust fund and must be devoted
to public trust purposes and cannot be diverted to private profit or benefit.23
Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not
lose its character as a charitable institution simply because the gift or donation is in the form
of subsidies granted by the government. As held by the State Supreme Court of 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 come from the
government. In both Intermountain Health Careand the present case, the crux is the
presence or absence of material reciprocity. It is entirely irrelevant to this analysis that the
government, rather than a private benefactor, chose to make up the deficit resulting from
the exchange between St. Mark’s Tower and the tenants by making a contribution to the
landlord, just as it would have been irrelevant in Intermountain Health Care if the patients’
income supplements had come 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 does not dictate the denial of
a charitable exemption if the facts otherwise support such 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 for the operation
of the hospital. It even incurred a net loss in 1991 and 1992 from its operations.
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 not
exempt from real property taxes as these are not actually, directly and exclusively used for
charitable purposes.
The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.
Taxation is the rule and exemption is the exception. The effect of an exemption is equivalent
to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown
and based on language in the law too plain to be mistaken.26 As held in Salvation Army v.
Hoehn:27
An intention on the part of the legislature to grant an exemption from the taxing power of
the state will never be implied from language which will admit of any other reasonable
construction. Such an intention must be expressed in clear and unmistakable terms, or
18
 must appear by necessary implication from the language used, for it is a well settled
principle that, when a special privilege or exemption is claimed under a statute, charter or
act of incorporation, it is to be construed strictly against the property owner and in favor
of the public. This principle applies with peculiar force to a claim of exemption from
taxation . …28
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically
provides that the petitioner shall enjoy the tax exemptions and privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation
organized primarily to help combat the high incidence of lung and pulmonary diseases in
the Philippines, all donations, contributions, endowments and equipment and supplies to
be imported by authorized entities or persons and by the Board of Trustees of the Lung
Center of the Philippines, Inc., for the actual use 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 maximum deductible amount under Section 30, paragraph (h), of the
National Internal Revenue 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 or instrumentality
thereof with respect to equipment purchases made by, or for the Lung Center.29
It is plain as day that under the decree, the petitioner does not enjoy any property tax
exemption privileges for its real properties as well as the building constructed thereon. If the
intentions were otherwise, the same should have been among the enumeration of 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 is expressed in the familiar
maxim, expressio unius est exclusio alterius.
The rule of expressio unius est exclusio alterius is formulated in a number of ways. One
variation of the rule is the principle that what is expressed puts an end to 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 or construction, be extended to
other matters.
...
The rule of expressio unius est exclusio alterius and its variations are canons of restrictive
interpretation. They are based on the rules of logic and the natural workings of the human
mind. They are predicated upon one’s own voluntary act and not upon that of others.
They proceed from the premise that the legislature would 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 reasonable presumption
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 would be 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, and
improvements, actually, directly and exclusively used for religious, charitable or
educational purposes shall be exempt from taxation.32
The tax exemption under this constitutional provision covers property taxes only.33 As Chief
Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission,
explained: ". . . what is exempted is not the institution itself . . .; those exempted from real
estate taxes are lands, buildings and improvements actually, directly and exclusively used
for religious, charitable or educational purposes."34
Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act
No. 7160 (otherwise known as the Local Government Code of 1991) as follows:
SECTION 234. Exemptions from Real Property Tax. – The following are exempted from
payment of the real property tax:
...
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusivelyused for religious, charitable or
educational purposes.35
We note that under the 1935 Constitution, "... all lands, buildings, and improvements used
‘exclusively’ for … charitable … purposes shall be exempt from taxation."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 that such property be used "actually" and
"directly" for such purposes.37
19
In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely individual for her business enterprise under the business name "Elliptical Orchids and
on our ruling in Herrera v. Quezon City Board of Assessment Appeals which was promulgated Garden Center." Indeed, the petitioner’s evidence shows that it collected ₱1,136,483.45 as
on September 30, 1961 before the 1973 and 1987 Constitutions took effect.38 As this Court rentals in 1991 and ₱1,679,999.28 for 1992 from the said lessees.
held in Province of Abra v. Hernando:39 Accordingly, we hold that the portions of the land leased to private entities as well as those
… Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents parts of the hospital leased to private individuals are not exempt from such taxes.45 On the
appurtenant thereto, and all lands, buildings, and improvements used exclusively for other hand, the portions of the land occupied by the hospital and portions of the hospital
religious, charitable, or educational purposes shall be exempt from taxation." The present used for its patients, whether paying or non-paying, are exempt from real property taxes.
Constitution added "charitable institutions, mosques, and non-profit cemeteries" and IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent
required that for the exemption of "lands, buildings, and improvements," they should not Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the precise
only be "exclusively" but also "actually" and "directly" used for religious or charitable portions of the land and the area thereof which are leased to private persons, and to
purposes. The Constitution is worded differently. The change should not be ignored. It compute the real property taxes due thereon as provided for by law.
must be duly taken into consideration. Reliance on past decisions would have sufficed
were the words "actually" as well as "directly" not added. There must be proof therefore SO ORDERED.
of the actual and direct use of the lands, buildings, and improvements for religious or
charitable purposes to be exempt from taxation. …
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the
exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is
a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is
defined as possessed and enjoyed to the exclusion of others; debarred from participation or
enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege
exclusively."40 If real property is used for one or more commercial purposes, it is not
exclusively used for the exempted purposes but is subject to taxation.41 The words
"dominant use" or "principal use" cannot be substituted for the words "used exclusively"
without doing violence to the Constitutions and the law.42 Solely is synonymous with
exclusively.43
What is meant by actual, direct and exclusive use of the property for charitable purposes is
the direct and immediate and actual application of the property itself to the purposes for
which the charitable institution is organized. It is not the use of the income from the real
property that is determinative of whether the property is used for tax-exempt purposes.44
The petitioner failed to discharge its burden to prove that the entirety of its real property is
actually, directly and exclusively used for charitable purposes. While portions of the hospital
are used for the treatment of patients and the dispensation of medical services to them,
whether paying or non-paying, other portions thereof are being leased to private individuals
for their clinics and a canteen. Further, a portion of the land is being leased to a private

20
 G.R. No. 149110 April 9, 2003
NATIONAL POWER CORPORATION, petitioner, vs. CITY OF CABANATUAN, respondent.
PUNO, J.:
This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals
dated March 12, 2001 and July 10, 2001, respectively, finding petitioner National Power
Corporation (NPC) liable to pay franchise tax to respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation created under
Commonwealth Act No. 120, as amended.4 It is tasked to undertake the "development of
hydroelectric generations of power and the production of electricity from nuclear,
geothermal and other sources, as well as, the transmission of electric power on a
nationwide basis."5 Concomitant to its mandated duty, petitioner has, among others, the
power to construct, operate and maintain power plants, auxiliary plants, power stations and
substations for the purpose of developing hydraulic power and supplying such power to the
inhabitants.6
For many years now, petitioner sells electric power to the residents of Cabanatuan City,
posting a gross income of P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance
No. 165-92,8 the respondent assessed the petitioner a franchise tax amounting to
P808,606.41, representing 75% of 1% of the latter's gross receipts for the preceding year.9
Petitioner, whose capital stock was subscribed and paid wholly by the Philippine
Government,10 refused to pay the tax assessment. It argued that the respondent has no
authority to impose tax on government entities. Petitioner also contended that as a non-
profit organization, it is exempted from the payment of all forms of taxes, charges, duties or
fees11 in accordance with sec. 13 of Rep. Act No. 6395, as amended, viz:
"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees,
Imposts and Other Charges by Government and Governmental Instrumentalities.- The
Corporation shall be non-profit and shall devote all its return from its capital investment,
as well as excess revenues from its operation, for expansion. To enable the Corporation to
pay its indebtedness and obligations and in furtherance and effective implementation of
the policy enunciated in Section one of this Act, the Corporation is hereby exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in
any court or administrative proceedings in which it may be a party, restrictions and duties
to the Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government agencies and
instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees
on import of foreign goods required for its operations and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of
the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the Corporation in the generation,
transmission, utilization, and sale of electric power."12
The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City,
demanding that petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of
the amount of tax, and 2% monthly interest.13Respondent alleged that petitioner's
exemption from local taxes has been repealed by section 193 of Rep. Act No. 7160,14 which
reads as follows:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock
and non-profit hospitals and educational institutions, are hereby withdrawn upon the
effectivity of this Code."
On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that the
tax exemption privileges granted to petitioner subsist despite the passage of Rep. Act No.
7160 for the following reasons: (1) Rep. Act No. 6395 is a particular law and it may not be
repealed by Rep. Act No. 7160 which is a general law; (2) section 193 of Rep. Act No. 7160 is
in the nature of an implied repeal which is not favored; and (3) local governments have no
power to tax instrumentalities of the national government. Pertinent portion of the Order
reads:
"The question of whether a particular law has been repealed or not by a subsequent law is
a matter of legislative intent. The lawmakers may expressly repeal a law by incorporating
therein repealing provisions which expressly and specifically cite(s) the particular law or
laws, and portions thereof, that are intended to be repealed. A declaration in a statute,
usually in its repealing clause, that a particular and specific law, identified by its number or
title is repealed is an express repeal; all others are implied repeal. Sec. 193 of R.A. No.
7160 is an implied repealing clause because it fails to identify the act or acts that are
21
 intended to be repealed. It is a well-settled rule of statutory construction that repeals of
statutes by implication are not favored. The presumption is against inconsistency and
repugnancy for the legislative is presumed to know the existing laws on the subject and
not to have enacted inconsistent or conflicting statutes. It is also a well-settled rule that,
generally, general law does not repeal a special law unless it clearly appears that the
legislative has intended by the latter general act to modify or repeal the earlier special
law. Thus, despite the passage of R.A. No. 7160 from which the questioned Ordinance No.
165-92 was based, the tax exemption privileges of defendant NPC remain.
Another point going against plaintiff in this case is the ruling of the Supreme Court in the
case of Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it
was held that:
'Local governments have no power to tax instrumentalities of the National Government.
PAGCOR is a government owned or controlled corporation with an original charter, PD
1869. All of its shares of stocks are owned by the National Government. xxx Being an
instrumentality of the government, PAGCOR should be and actually is exempt from local
taxes. Otherwise, its operation might be burdened, impeded or subjected to control by
mere local government.'
Like PAGCOR, NPC, being a government owned and controlled corporation with an original
charter and its shares of stocks owned by the National Government, is beyond the taxing
power of the Local Government. Corollary to this, it should be noted here that in the NPC
Charter's declaration of Policy, Congress declared that: 'xxx (2) the total electrification of
the Philippines through the development of power from all services to meet the needs of
industrial development and dispersal and needs of rural electrification are primary
objectives of the nations which shall be pursued coordinately and supported by all
instrumentalities and agencies of the government, including its financial institutions.'
(underscoring supplied). To allow plaintiff to subject defendant to its tax-ordinance would
be to impede the avowed goal of this government instrumentality.
Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power
is limited to that which is provided for in its charter or other statute. Any grant of taxing
power is to be construed strictly, with doubts resolved against its existence.
From the existing law and the rulings of the Supreme Court itself, it is very clear that the
plaintiff could not impose the subject tax on the defendant."16
On appeal, the Court of Appeals reversed the trial court's Order17 on the ground that section
193, in relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions
granted to the petitioner.18 It ordered the petitioner to pay the respondent city government
the following: (a) the sum of P808,606.41 representing the franchise tax due based on gross
receipts for the year 1992, (b) the tax due every year thereafter based in the gross receipts
earned by NPC, (c) in all cases, to pay a surcharge of 25% of the tax due and unpaid, and (d)
the sum of P 10,000.00 as litigation expense.19
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's
Decision. This was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated
therein that the taxing power of the province under Art. 137 (sic) of the Local Government
Code refers merely to private persons or corporations in which category it (NPC) does not
belong, and that the LGC (RA 7160) which is a general law may not impliedly repeal the
NPC Charter which is a special law—finds the answer in Section 193 of the LGC to the
effect that 'tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations
except local water districts xxx are hereby withdrawn.' The repeal is direct and
unequivocal, not implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.
SO ORDERED."20
In this petition for review, petitioner raises the following issues:
"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC NON-PROFIT
CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO CONSIDER THAT
SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION 131 APPLIES
ONLY TO PRIVATE PERSONS OR CORPORATIONS ENJOYING A FRANCHISE.
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION FROM ALL
FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE LOCAL GOVERNMENT
CODE AS THE ENACTMENT OF A LATER LEGISLATION, WHICH IS A GENERAL LAW, CANNOT
BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN EXERCISE OF
POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE LOCAL
GOVERNMENT CODE."21
It is beyond dispute that the respondent city government has the authority to issue
Ordinance No. 165-92 and impose an annual tax on "businesses enjoying a franchise,"
pursuant to section 151 in relation to section 137 of the LGC, viz:
22
 "Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other
special law, the province may impose a tax on businesses enjoying a franchise, at a rate
not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized, within its territorial
jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of
one percent (1%) of the capital investment. In the succeeding calendar year, regardless of
when the business started to operate, the tax shall be based on the gross receipts for the
preceding calendar year, or any fraction thereof, as provided herein." (emphasis supplied)
x x x governmental, which places it in the category of an agency or instrumentality of the
Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may
levy the taxes, fees, and charges which the province or municipality may
impose: Provided, however, That the taxes, fees and charges levied and collected by highly
urbanized and independent component cities shall accrue to them and distributed in
accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of
professional and amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual franchise tax to the
respondent city government. It contends that sections 137 and 151 of the LGC in relation to
section 131, limit the taxing power of the respondent city government to private entities
that are engaged in trade or occupation for profit.22
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public
interest which is conferred upon private persons or corporations, under such terms and
conditions as the government and its political subdivisions may impose in the interest of the
public welfare, security and safety." From the phraseology of this provision, the petitioner
claims that the word "private" modifies the terms "persons" and "corporations." Hence,
when the LGC uses the term "franchise," petitioner submits that it should refer specifically
to franchises granted to private natural persons and to private corporations.23 Ergo, its
charter should not be considered a "franchise" for the purpose of imposing the franchise tax
in question.
On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial
activity regularly engaged in as means of livelihood or with a view to profit." Petitioner
claims that it is not engaged in an activity for profit, in as much as its charter specifically
provides that it is a "non-profit organization." In any case, petitioner argues that the
accumulation of profit is merely incidental to its operation; all these profits are required by
law to be channeled for expansion and improvement of its facilities and services.24
Petitioner also alleges that it is an instrumentality of the National Government,25 and as
such, may not be taxed by the respondent city government. It cites the doctrine in Basco vs.
Philippine Amusement and Gaming Corporation26where this Court held that local
governments have no power to tax instrumentalities of the National Government, viz:
"Local governments have no power to tax instrumentalities of the National Government.
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is
Government. Being an instrumentality of the Government, PAGCOR should be and
actually is exempt from local taxes. Otherwise, its operation might be burdened, impeded
or subjected to control by a mere local government.
'The states have no power by taxation or otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into
execution the powers vested in the federal government. (MC Culloch v. Maryland, 4
Wheat 316, 4 L Ed. 579)'
This doctrine emanates from the 'supremacy' of the National Government over local
governments.
'Justice Holmes, speaking for the Supreme Court, made reference to the entire absence
of power on the part of the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can regulate a federal instrumentality in
such a way as to prevent it from consummating its federal responsibilities, or even
seriously burden it from accomplishment of them.' (Antieau, Modern Constitutional Law,
Vol. 2, p. 140, italics supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of
what local authorities may perceive to be undesirable activities or enterprise using the
power to tax as ' a tool regulation' (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the 'power to destroy' (Mc
Culloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of
the very entity which has the inherent power to wield it."27
23
Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of
government-owned or controlled corporations, is in the nature of an implied repeal. A
special law, its charter cannot be amended or modified impliedly by the local government
code which is a general law. Consequently, petitioner claims that its exemption from all
taxes, fees or charges under its charter subsists despite the passage of the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of statutes by implication
are not favored and as much as possible, effect must be given to all enactments of the
legislature. Moreover, it has to be conceded that the charter of the NPC constitutes a
special law. Republic Act No. 7160, is a general law. It is a basic rule in statutory
construction that the enactment of a later legislation which is a general law cannot be
construed to have repealed a special law. Where there is a conflict between a general law
and a special statute, the special statute should prevail since it evinces the legislative
intent more clearly than the general statute."28
Finally, petitioner submits that the charter of the NPC, being a valid exercise of police
power, should prevail over the LGC. It alleges that the power of the local government to
impose franchise tax is subordinate to petitioner's exemption from taxation; "police power
being the most pervasive, the least limitable and most demanding of all powers, including
the power of taxation."29
The petition is without merit.
Taxes are the lifeblood of the government,30 for without taxes, the government can neither
exist nor endure. A principal attribute of sovereignty,31 the exercise of taxing power derives
its source from the very existence of the state whose social contract with its citizens obliges
it to promote public interest and common good. The theory behind the exercise of the
power to tax emanates from necessity;32 without taxes, government cannot fulfill its
mandate of promoting the general welfare and well-being of the people.
In recent years, the increasing social challenges of the times expanded the scope of state
activity, and taxation has become a tool to realize social justice and the equitable
distribution of wealth, economic progress and the protection of local industries as well as
public welfare and similar objectives.33 Taxation assumes even greater significance with the
ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct authority to levy taxes,
fees and other charges34 pursuant to Article X, section 5 of the 1987 Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to create its own sources of
revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees
and charges shall accrue exclusively to the Local Governments."
This paradigm shift results from the realization that genuine development can be achieved
only by strengthening local autonomy and promoting decentralization of governance. For a
long time, the country's highly centralized government structure has bred a culture of
dependence among local government leaders upon the national leadership. It has also
"dampened the spirit of initiative, innovation and imaginative resilience in matters of local
development on the part of local government leaders."35 The only way to shatter this
culture of dependence is to give the LGUs a wider role in the delivery of basic services, and
confer them sufficient powers to generate their own sources for the purpose. To achieve
this goal, section 3 of Article X of the 1987 Constitution mandates Congress to enact a local
government code that will, consistent with the basic policy of local autonomy, set the
guidelines and limitations to this grant of taxing powers, viz:
"Section 3. The Congress shall enact a local government code which shall provide for a
more responsive and accountable local government structure instituted through a system
of decentralization with effective mechanisms of recall, initiative, and referendum,
allocate among the different local government units their powers, responsibilities, and
resources, and provide for the qualifications, election, appointment and removal, term,
salaries, powers and functions and duties of local officials, and all other matters relating to
the organization and operation of the local units."
To recall, prior to the enactment of the Rep. Act No. 7160,36 also known as the Local
Government Code of 1991 (LGC), various measures have been enacted to promote local
autonomy. These include the Barrio Charter of 1959,37 the Local Autonomy Act of
1959,38 the Decentralization Act of 196739 and the Local Government Code of
1983.40 Despite these initiatives, however, the shackles of dependence on the national
government remained. Local government units were faced with the same problems that
hamper their capabilities to participate effectively in the national development efforts,
among which are: (a) inadequate tax base, (b) lack of fiscal control over external sources of
income, (c) limited authority to prioritize and approve development projects, (d) heavy
dependence on external sources of income, and (e) limited supervisory control over
personnel of national line agencies.41
Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC
effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to
include taxes which were prohibited by previous laws such as the imposition of taxes on
forest products, forest concessionaires, mineral products, mining operations, and the like.
24
The LGC likewise provides enough flexibility to impose tax rates in accordance with their
needs and capabilities. It does not prescribe graduated fixed rates but merely specifies the
minimum and maximum tax rates and leaves the determination of the actual rates to the
respective sanggunian.43
One of the most significant provisions of the LGC is the removal of the blanket exclusion of
instrumentalities and agencies of the national government from the coverage of local
taxation. Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind
on the National Government, its agencies and instrumentalities, this rule now admits an
exception, i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees
or charges on the aforementioned entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the Local Government Units.-
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:
x x x rights under a secondary or special franchise are vested in the corporation and may
(o) Taxes, fees, or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units." (emphasis supplied)
In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine
Amusement and Gaming Corporation44 relied upon by the petitioner to support its claim no
longer applies. To emphasize, the Basco case was decided prior to the effectivity of the LGC,
when no law empowering the local government units to tax instrumentalities of the
National Government was in effect. However, as this Court ruled in the case of Mactan Cebu
International Airport Authority (MCIAA) vs. Marcos,45 nothing prevents Congress from
decreeing that even instrumentalities or agencies of the government performing
governmental functions may be subject to tax.46 In enacting the LGC, Congress exercised its
prerogative to tax instrumentalities and agencies of government as it sees fit. Thus, after
reviewing the specific provisions of the LGC, this Court held that MCIAA, although an
instrumentality of the national government, was subject to real property tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a
general rule, as laid down in section 133, the taxing power of local governments cannot
extend to the levy of inter alia, 'taxes, fees and charges of any kind on the national
government, its agencies and instrumentalities, and local government units'; however,
pursuant to section 232, provinces, cities and municipalities in the Metropolitan Manila
Area may impose the real property tax except on, inter alia, 'real property owned by the
Republic of the Philippines or any of its political subdivisions except when the beneficial
use thereof has been granted for consideration or otherwise, to a taxable person as
provided in the item (a) of the first paragraph of section 12.'"47
In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the
respondent city government to impose on the petitioner the franchise tax in question.
In its general signification, a franchise is a privilege conferred by government authority,
which does not belong to citizens of the country generally as a matter of common right.48 In
its specific sense, a franchise may refer to a general or primary franchise, or to a special or
secondary franchise. The former relates to the right to exist as a corporation, by virtue of
duly approved articles of incorporation, or a charter pursuant to a special law creating the
corporation.49 The right under a primary or general franchise is vested in the individuals who
compose the corporation and not in the corporation itself.50 On the other hand, the latter
refers to the right or privileges conferred upon an existing corporation such as the right to
use the streets of a municipality to lay pipes of tracks, erect poles or string wires.51 The
ordinarily be conveyed or mortgaged under a general power granted to a corporation to
dispose of its property, except such special or secondary franchises as are charged with a
public use.52
In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a
secondary or special franchise. This is to avoid any confusion when the word franchise is
used in the context of taxation. As commonly used, a franchise tax is "a tax on the privilege
of transacting business in the state and exercising corporate franchises granted by the
state."53 It is not levied on the corporation simply for existing as a corporation, upon its
property54 or its income,55 but on its exercise of the rights or privileges granted to it by the
government. Hence, a corporation need not pay franchise tax from the time it ceased to do
business and exercise its franchise.56 It is within this context that the phrase "tax on
businesses enjoying a franchise" in section 137 of the LGC should be interpreted and
understood. Verily, to determine whether the petitioner is covered by the franchise tax in
question, the following requisites should concur: (1) that petitioner has a "franchise" in the
sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges
under this franchise within the territory of the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act
No. 7395, constitutes petitioner's primary and secondary franchises. It serves as the
petitioner's charter, defining its composition, capitalization, the appointment and the
specific duties of its corporate officers, and its corporate life span.57 As its secondary
25
franchise, Commonwealth Act No. 120, as amended, vests the petitioner the following
powers which are not available to ordinary corporations, viz:
"x x x
(e) To conduct investigations and surveys for the development of water power in any part
of the Philippines;
(f) To take water from any public stream, river, creek, lake, spring or waterfall in the
Philippines, for the purposes specified in this Act; to intercept and divert the flow of
waters from lands of riparian owners and from persons owning or interested in waters
which are or may be necessary for said purposes, upon payment of just compensation
therefor; to alter, straighten, obstruct or increase the flow of water in streams or water
channels intersecting or connecting therewith or contiguous to its works or any part
thereof: Provided, That just compensation shall be paid to any person or persons whose
property is, directly or indirectly, adversely affected or damaged thereby;
(g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs,
pipes, mains, transmission lines, power stations and substations, and other works for the
purpose of developing hydraulic power from any river, creek, lake, spring and waterfall in
the Philippines and supplying such power to the inhabitants thereof; to acquire, construct,
install, maintain, operate, and improve gas, oil, or steam engines, and/or other prime
movers, generators and machinery in plants and/or auxiliary plants for the production of
electric power; to establish, develop, operate, maintain and administer power and lighting
systems for the transmission and utilization of its power generation; to sell electric power
in bulk to (1) industrial enterprises, (2) city, municipal or provincial systems and other
government institutions, (3) electric cooperatives, (4) franchise holders, and (5) real estate
subdivisions x x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and
otherwise dispose of property incident to, or necessary, convenient or proper to carry out
the purposes for which the Corporation was created: Provided, That in case a right of way
is necessary for its transmission lines, easement of right of way shall only be sought:
Provided, however, That in case the property itself shall be acquired by purchase, the cost
thereof shall be the fair market value at the time of the taking of such property;
(i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume,
street, avenue, highway or railway of private and public ownership, as the location of said
works may require xxx;
(j) To exercise the right of eminent domain for the purpose of this Act in the manner
provided by law for instituting condemnation proceedings by the national, provincial and
municipal governments;
x x x
(m) To cooperate with, and to coordinate its operations with those of the National
Electrification Administration and public service entities;
(n) To exercise complete jurisdiction and control over watersheds surrounding the
reservoirs of plants and/or projects constructed or proposed to be constructed by the
Corporation. Upon determination by the Corporation of the areas required for watersheds
for a specific project, the Bureau of Forestry, the Reforestation Administration and the
Bureau of Lands shall, upon written advice by the Corporation, forthwith surrender
jurisdiction to the Corporation of all areas embraced within the watersheds, subject to
existing private rights, the needs of waterworks systems, and the requirements of
domestic water supply;
(o) In the prosecution and maintenance of its projects, the Corporation shall adopt
measures to prevent environmental pollution and promote the conservation,
development and maximum utilization of natural resources xxx "58
With these powers, petitioner eventually had the monopoly in the generation and
distribution of electricity. This monopoly was strengthened with the issuance of Pres.
Decree No. 40,59 nationalizing the electric power industry. Although Exec. Order No.
21560 thereafter allowed private sector participation in the generation of electricity, the
transmission of electricity remains the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within the respondent city
government's territorial jurisdiction pursuant to the powers granted to it by Commonwealth
Act No. 120, as amended. From its operations in the City of Cabanatuan, petitioner realized
a gross income of P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and
ought to be, subject of the franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply
because its stocks are wholly owned by the National Government, and its charter
characterized it as a "non-profit" organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on the exercise by the
corporation of a privilege to do business. The taxable entity is the corporation which
26
exercises the franchise, and not the individual stockholders. By virtue of its charter,
petitioner was created as a separate and distinct entity from the National Government. It
can sue and be sued under its own name,61 and can exercise all the powers of a corporation
under the Corporation Code.62
To be sure, the ownership by the National Government of its entire capital stock does not
necessarily imply that petitioner is not engaged in business. Section 2 of Pres. Decree No.
202963 classifies government-owned or controlled corporations (GOCCs) into those
performing governmental functions and those performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a non-stock
corporation, whether performing governmental or proprietary functions, which is directly
chartered by special law or if organized under the general corporation law is owned or
controlled by the government directly, or indirectly through a parent corporation or
subsidiary corporation, to the extent of at least a majority of its outstanding voting capital
stock x x x." (emphases supplied)
Governmental functions are those pertaining to the administration of government, and as
such, are treated as absolute obligation on the part of the state to perform while
proprietary functions are those that are undertaken only by way of advancing the general
interest of society, and are merely optional on the government.64 Included in the class of
GOCCs performing proprietary functions are "business-like" entities such as the National
Steel Corporation (NSC), the National Development Corporation (NDC), the Social Security
System (SSS), the Government Service Insurance System (GSIS), and the National Water
Sewerage Authority (NAWASA),65 among others.
Petitioner was created to "undertake the development of hydroelectric generation of power
and the production of electricity from nuclear, geothermal and other sources, as well as the
transmission of electric power on a nationwide basis."66 Pursuant to this mandate,
petitioner generates power and sells electricity in bulk. Certainly, these activities do not
partake of the sovereign functions of the government. They are purely private and
commercial undertakings, albeit imbued with public interest. The public interest involved in
its activities, however, does not distract from the true nature of the petitioner as a
commercial enterprise, in the same league with similar public utilities like telephone and
telegraph companies, railroad companies, water supply and irrigation companies, gas, coal
or light companies, power plants, ice plant among others; all of which are declared by this
Court as ministrant or proprietary functions of government aimed at advancing the general
interest of society.67
A closer reading of its charter reveals that even the legislature treats the character of the
petitioner's enterprise as a "business," although it limits petitioner's profits to twelve
percent (12%), viz:68
"(n) When essential to the proper administration of its corporate affairs or necessary for
the proper transaction of its business or to carry out the purposes for which it was
organized, to contract indebtedness and issue bonds subject to approval of the President
upon recommendation of the Secretary of Finance;
(o) To exercise such powers and do such things as may be reasonably necessary to carry
out the business and purposes for which it was organized, or which, from time to time,
may be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish
the said purpose xxx."(emphases supplied)
It is worthy to note that all other private franchise holders receiving at least sixty percent
(60%) of its electricity requirement from the petitioner are likewise imposed the cap of
twelve percent (12%) on profits.69 The main difference is that the petitioner is mandated to
devote "all its returns from its capital investment, as well as excess revenues from its
operation, for expansion"70 while other franchise holders have the option to distribute their
profits to its stockholders by declaring dividends. We do not see why this fact can be a
source of difference in tax treatment. In both instances, the taxable entity is the
corporation, which exercises the franchise, and not the individual stockholders.
We also do not find merit in the petitioner's contention that its tax exemptions under its
charter subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be
shown to exist clearly and categorically, and supported by clear legal provisions.71 In the
case at bar, the petitioner's sole refuge is section 13 of Rep. Act No. 6395 exempting from,
among others, "all income taxes, franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government agencies and
instrumentalities." However, section 193 of the LGC withdrew, subject to limited exceptions,
the sweeping tax privileges previously enjoyed by private and public corporations. Contrary
to the contention of petitioner, section 193 of the LGC is an express, albeit general, repeal of
all statutes granting tax exemptions from local taxes.72 It reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A. No.
27
 6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code." (emphases supplied)
It is a basic precept of statutory construction that the express mention of one person, thing,
act, or consequence excludes all others as expressed in the familiar maxim expressio unius
est exclusio alterius.73 Not being a local water district, a cooperative registered under R.A.
No. 6938, or a non-stock and non-profit hospital or educational institution, petitioner clearly
does not belong to the exception. It is therefore incumbent upon the petitioner to point to
some provisions of the LGC that expressly grant it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs
can impose franchise tax "notwithstanding any exemption granted by any law or other
special law." This particular provision of the LGC does not admit any exception. In City
Government of San Pablo, Laguna v. Reyes,74 MERALCO's exemption from the payment of
franchise taxes was brought as an issue before this Court. The same issue was involved in
the subsequent case of Manila Electric Company v. Province of Laguna.75 Ruling in favor of
the local government in both instances, we ruled that the franchise tax in question is
imposable despite any exemption enjoyed by MERALCO under special laws, viz:
"It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the
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 franchise tax
'notwithstanding any exemption granted by any law or other special law' is all-
encompassing and clear. The franchise tax is imposable despite any exemption enjoyed
under special laws.
Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that
unless otherwise provided in this Code, tax exemptions or incentives granted to or
presently enjoyed by all persons, whether natural or juridical, including government-
owned or controlled corporations except (1) local water districts, (2) cooperatives duly
registered under R.A. 6938, (3) non-stock and non-profit hospitals and educational
institutions, 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 statutory
construction that the express mention of one person, thing, act, or consequence excludes
all others as expressed in the familiar maxim expressio unius est exclusio alterius. In the
absence of any provision of the Code to the contrary, and we find no other provision in
point, any existing tax exemption or incentive enjoyed by MERALCO under existing law
was clearly intended to be withdrawn.
Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the
local government unit may now impose a local tax at a rate not exceeding 50% of 1% of
the gross annual receipts for the preceding calendar based on the incoming receipts
realized within its territorial jurisdiction. The legislative purpose to withdraw tax privileges
enjoyed under existing law or charter is clearly manifested by the language used on (sic)
Sections 137 and 193 categorically withdrawing such exemption subject only to the
exceptions enumerated. Since it would be not only tedious and impractical to attempt to
enumerate all the existing statutes providing for special tax exemptions or privileges, the
LGC provided for an express, albeit general, withdrawal of such exemptions or privileges.
No more unequivocal language could have been used."76(emphases supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances
duly approved, to grant tax exemptions, initiatives or reliefs.77 But in enacting section 37 of
Ordinance No. 165-92 which imposes an annual franchise tax "notwithstanding any
exemption granted by law or other special law," the respondent city government clearly did
not intend to exempt the petitioner from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to
finance and support myriad activities of the local government units for the delivery of basic
services essential to the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. As this Court observed in the Mactan case, "the
original reasons for the withdrawal of tax exemption privileges granted to government-
owned or controlled corporations and all other units of government were that such privilege
resulted in serious tax base erosion and distortions in the tax treatment of similarly situated
enterprises."78 With the added burden of devolution, it is even more imperative for
government entities to share in the requirements of development, fiscal or otherwise, by
paying taxes or other charges due from them.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution
of the Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby
AFFIRMED.
SO ORDERED.
28