Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 76573 September 14, 1989

MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX
APPEALS, respondents.

Melquiades C. Gutierrez for petitioner.

The Solicitor General for respondents.

FERNAN, C.J.:

Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized

and existing under the laws of Japan and duly licensed to engage in business under
Philippine laws with branch office at the 4th Floor, FEEMI Building, Aduana Street,
Intramuros, Manila seeks the reversal of the decision of the Court of Tax Appeals 1dated
February 12, 1986 denying its claim for refund or tax credit in the amount of P229,424.40 representing
alleged overpayment of branch profit remittance tax withheld from dividends by Atlantic Gulf and Pacific
Co. of Manila (AG&P).

The following facts are undisputed: Marubeni Corporation of Japan has equity investments
in AG&P of Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid
cash dividends to petitioner in the amount of P849,720 and withheld the corresponding 10%
final dividend tax thereon. Similarly, for the third quarter of 1981 ending September 30,
AG&P declared and paid P849,720 as cash dividends to petitioner and withheld the
corresponding 10% final dividend tax thereon. 2

AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net
not only of the 10% final dividend tax in the amounts of P764,748 for the first and third
quarters of 1981, but also of the withheld 15% profit remittance tax based on the remittable
amount after deducting the final withholding tax of 10%. A schedule of dividends declared
and paid by AG&P to its stockholder Marubeni Corporation of Japan, the 10% final
intercorporate dividend tax and the 15% branch profit remittance tax paid thereon, is shown
below:

1981 FIRST THIRD TOTAL OF

QUARTER QUARTER FIRST and
(three months (three months THIRD
 ended ended quarters
3.31.81) (In 9.30.81)
Pesos)

Cash Dividends Paid 849,720.44 849,720.00 1,699,440.00

10% Dividend Tax 84,972.00 84,972.00 169,944.00

Withheld

Cash Dividend net of 764,748.00 764,748.00 1,529,496.00

10% Dividend Tax
Withheld

15% Branch Profit 114,712.20 114,712.20 229,424.40 3

Remittance Tax
Withheld

Net Amount Remitted 650,035.80 650,035.80 1,300,071.60

to Petitioner

The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of
P114,712.20 for the first quarter of 1981 were paid to the Bureau of Internal Revenue by
AG&P on April 20, 1981 under Central Bank Receipt No. 6757880. Likewise, the 10% final
dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712 for the third
quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on August 4, 1981
under Central Bank Confirmation Receipt No. 7905930. 4

Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch
profit remittance on cash dividends declared and remitted to petitioner at its head office in
Tokyo in the total amount of P229,424.40 on April 20 and August 4, 1981. 5

In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres,
Velayo and Company, sought a ruling from the Bureau of Internal Revenue on whether or
not the dividends petitioner received from AG&P are effectively connected with its conduct
or business in the Philippines as to be considered branch profits subject to the 15% profit
remittance tax imposed under Section 24 (b) (2) of the National Internal Revenue Code as
amended by Presidential Decrees Nos. 1705 and 1773.

In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:

Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits
remitted abroad by a branch office to its head office which are effectively
connected with its trade or business in the Philippines are subject to the 15%
profit remittance tax. To be effectively connected it is not necessary that the
income be derived from the actual operation of taxpayer-corporation's trade
or business; it is sufficient that the income arises from the business activity in
which the corporation is engaged. For example, if a resident foreign
corporation is engaged in the buying and selling of machineries in the
Philippines and invests in some shares of stock on which dividends are
subsequently received, the dividends thus earned are not considered
'effectively connected' with its trade or business in this country. (Revenue
Memorandum Circular No. 55-80).

In the instant case, the dividends received by Marubeni from AG&P are not
income arising from the business activity in which Marubeni is engaged.
Accordingly, said dividends if remitted abroad are not considered branch
profits for purposes of the 15% profit remittance tax imposed by Section 24
(b) (2) of the Tax Code, as amended . . . 6

Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of
Internal Revenue on September 24, 1981, petitioner claimed for the refund or issuance of a
tax credit of P229,424.40 "representing profit tax remittance erroneously paid on the
dividends remitted by Atlantic Gulf and Pacific Co. of Manila (AG&P) on April 20 and August
4, 1981 to ... head office in Tokyo. 7

On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim
for refund/credit of P229,424.40 on the following grounds:

While it is true that said dividends remitted were not subject to the 15% profit
remittance tax as the same were not income earned by a Philippine Branch of
Marubeni Corporation of Japan; and neither is it subject to the 10%
intercorporate dividend tax, the recipient of the dividends, being a non-
resident stockholder, nevertheless, said dividend income is subject to the 25
% tax pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13, 1980
between the Philippines and Japan.

Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation,

Japan is subject to 25 % tax, and that the taxes withheld of 10 % as
intercorporate dividend tax and 15 % as profit remittance tax totals (sic) 25 %,
the amount refundable offsets the liability, hence, nothing is left to be
refunded. 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by
the Commissioner of Internal Revenue in its assailed judgment of February 12, 1986. 9

In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:

Whatever the dialectics employed, no amount of sophistry can ignore the fact
that the dividends in question are income taxable to the Marubeni Corporation
of Tokyo, Japan. The said dividends were distributions made by the Atlantic,
Gulf and Pacific Company of Manila to its shareholder out of its profits on the
investments of the Marubeni Corporation of Japan, a non-resident foreign
corporation. The investments in the Atlantic Gulf & Pacific Company of the
Marubeni Corporation of Japan were directly made by it and the dividends on
the investments were likewise directly remitted to and received by the
Marubeni Corporation of Japan. Petitioner Marubeni Corporation Philippine
Branch has no participation or intervention, directly or indirectly, in the
investments and in the receipt of the dividends. And it appears that the funds
invested in the Atlantic Gulf & Pacific Company did not come out of the funds
infused by the Marubeni Corporation of Japan to the Marubeni Corporation
Philippine Branch. As a matter of fact, the Central Bank of the Philippines, in
authorizing the remittance of the foreign exchange equivalent of (sic) the
dividends in question, treated the Marubeni Corporation of Japan as a non-
resident stockholder of the Atlantic Gulf & Pacific Company based on the
supporting documents submitted to it.

Subject to certain exceptions not pertinent hereto, income is taxable to the

person who earned it. Admittedly, the dividends under consideration were
earned by the Marubeni Corporation of Japan, and hence, taxable to the said
corporation. While it is true that the Marubeni Corporation Philippine Branch
is duly licensed to engage in business under Philippine laws, such dividends
are not the income of the Philippine Branch and are not taxable to the said
Philippine branch. We see no significance thereto in the identity concept or
principal-agent relationship theory of petitioner because such dividends are
the income of and taxable to the Japanese corporation in Japan and not to
the Philippine branch. 10

Hence, the instant petition for review.

It is the argument of petitioner corporation that following the principal-agent relationship

theory, Marubeni Japan is likewise a resident foreign corporation subject only to the 10 %
intercorporate final tax on dividends received from a domestic corporation in accordance
with Section 24(c) (1) of the Tax Code of 1977 which states:

Dividends received by a domestic or resident foreign corporation liable to tax

under this Code (1) Shall be subject to a final tax of 10% on the total
amount thereof, which shall be collected and paid as provided in Sections 53
and 54 of this Code ....
Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-
resident foreign corporation and not engaged in trade or business in the Philippines, is
subject to tax on income earned from Philippine sources at the rate of 35 % of its gross
income under Section 24 (b) (1) of the same Code which reads:

(b) Tax on foreign corporations (1) Non-resident corporations. A foreign

corporation not engaged in trade or business in the Philippines shall pay a tax
equal to thirty-five per cent of the gross income received during each taxable
year from all sources within the Philippines as ... dividends ....

but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax
Treaty of 1980 concluded between the Philippines and Japan. 11 Thus:

Article 10 (1) Dividends paid by a company which is a resident of a

Contracting State to a resident of the other Contracting State may be taxed in
that other Contracting State.

(2) However, such dividends may also be taxed in the Contracting State of
which the company paying the dividends is a resident, and according to the
laws of that Contracting State, but if the recipient is the beneficial owner of
the dividends the tax so charged shall not exceed;

(a) . . .

(b) 25 per cent of the gross amount of the dividends in all other cases.

Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine
sources is therefore the determination of whether it is a resident or a non-resident foreign
corporation under Philippine laws.

Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or
business" within the Philippines. Petitioner contends that precisely because it is engaged in
business in the Philippines through its Philippine branch that it must be considered as a
resident foreign corporation. Petitioner reasons that since the Philippine branch and the
Tokyo head office are one and the same entity, whoever made the investment in AG&P,
Manila does not matter at all. A single corporate entity cannot be both a resident and a non-
resident corporation depending on the nature of the particular transaction involved.
Accordingly, whether the dividends are paid directly to the head office or coursed through its
local branch is of no moment for after all, the head office and the office branch constitute but
one corporate entity, the Marubeni Corporation, which, under both Philippine tax and
corporate laws, is a resident foreign corporation because it is transacting business in the
Philippines.

The Solicitor General has adequately refuted petitioner's arguments in this wise:

The general rule that a foreign corporation is the same juridical entity as its
branch office in the Philippines cannot apply here. This rule is based on the
premise that the business of the foreign corporation is conducted through its
 branch office, following the principal agent relationship theory. It is understood
that the branch becomes its agent here. So that when the foreign corporation
transacts business in the Philippines independently of its branch, the
principal-agent relationship is set aside. The transaction becomes one of the
foreign corporation, not of the branch. Consequently, the taxpayer is the
foreign corporation, not the branch or the resident foreign corporation.

Corollarily, if the business transaction is conducted through the branch office,

the latter becomes the taxpayer, and not the foreign corporation. 12

In other words, the alleged overpaid taxes were incurred for the remittance of dividend
income to the head office in Japan which is a separate and distinct income taxpayer from
the branch in the Philippines. There can be no other logical conclusion considering the
undisputed fact that the investment (totalling 283.260 shares including that of nominee) was
made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni
Japan, but certainly not of the branch in the Philippines. It is thus clear that petitioner,
having made this independent investment attributable only to the head office, cannot now
claim the increments as ordinary consequences of its trade or business in the Philippines
and avail itself of the lower tax rate of 10 %.

But while public respondents correctly concluded that the dividends in dispute were neither
subject to the 15 % profit remittance tax nor to the 10 % intercorporate dividend tax, the
recipient being a non-resident stockholder, they grossly erred in holding that no refund was
forthcoming to the petitioner because the taxes thus withheld totalled the 25 % rate imposed
by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b).

To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in
taxation that each tax has a different tax basis. While the tax on dividends is directly levied
on the dividends received, "the tax base upon which the 15 % branch profit remittance tax is
imposed is the profit actually remitted abroad." 13

Public respondents likewise erred in automatically imposing the 25 % rate under Article 10
(2) (b) of the Tax Treaty as if this were a flat rate. A closer look at the Treaty reveals that the
tax rates fixed by Article 10 are the maximum rates as reflected in the phrase "shall not
exceed." This means that any tax imposable by the contracting state concerned should not
exceed the 25 % limitation and that said rate would apply only if the tax imposed by our
laws exceeds the same. In other words, by reason of our bilateral negotiations with Japan,
we have agreed to have our right to tax limited to a certain extent to attain the goals set
forth in the Treaty.

Petitioner, being a non-resident foreign corporation with respect to the transaction in

question, the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction
with the Philippine-Japan Treaty of 1980. Said section provides:

(b) Tax on foreign corporations. (1) Non-resident corporations ... (iii) On

dividends received from a domestic corporation liable to tax under this
Chapter, the tax shall be 15% of the dividends received, which shall be
collected and paid as provided in Section 53 (d) of this Code, subject to the
 condition that the country in which the non-resident foreign corporation is
domiciled shall allow a credit against the tax due from the non-resident
foreign corporation, taxes deemed to have been paid in the Philippines
equivalent to 20 % which represents the difference between the regular tax
(35 %) on corporations and the tax (15 %) on dividends as provided in this
Section; ....

Proceeding to apply the above section to the case at bar, petitioner, being a non-resident
foreign corporation, as a general rule, is taxed 35 % of its gross income from all sources
within the Philippines. [Section 24 (b) (1)].

However, a discounted rate of 15% is given to petitioner on dividends received from a

domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in
favor of petitioner, a tax credit of not less than 20 % of the dividends received. This 20 %
represents the difference between the regular tax of 35 % on non-resident foreign
corporations which petitioner would have ordinarily paid, and the 15 % special rate on
dividends received from a domestic corporation.

Consequently, petitioner is entitled to a refund on the transaction in question to be

computed as follows:

Total cash dividend paid ................P1,699,440.00

less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
------------------

Cash dividend net of 15 % tax

due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
-------------------

Amount to be refunded to petitioner

representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========

It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign
non-resident stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily
within the maximum ceiling of 25 % of the gross amount of the dividends as decreed in
Article 10 (2) (b) of the Tax Treaty.

There is one final point that must be settled. Respondent Commissioner of Internal
Revenue is laboring under the impression that the Court of Tax Appeals is covered by Batas
Pambansa Blg. 129, otherwise known as the Judiciary Reorganization Act of 1980. He
alleges that the instant petition for review was not perfected in accordance with Batas
Pambansa Blg. 129 which provides that "the period of appeal from final orders, resolutions,
awards, judgments, or decisions of any court in all cases shall be fifteen (15) days counted
from the notice of the final order, resolution, award, judgment or decision appealed from ....

This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax
Appeals which has been created by virtue of a special law, Republic Act No. 1125.
Respondent court is not among those courts specifically mentioned in Section 2 of BP Blg.
129 as falling within its scope.

Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order,
ruling or decision of the Court of Tax Appeals is given thirty (30) days from notice to appeal
therefrom. Otherwise, said order, ruling, or decision shall become final.

Records show that petitioner received notice of the Court of Tax Appeals's decision denying
its claim for refund on April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for
appeal), petitioner filed a motion for reconsideration which respondent court subsequently
denied on November 17, 1986, and notice of which was received by petitioner on November
26, 1986. Two days later, or on November 28, 1986, petitioner simultaneously filed a notice
of appeal with the Court of Tax Appeals and a petition for review with the Supreme
Court. 14 From the foregoing, it is evident that the instant appeal was perfected well within the 30-day
period provided under R.A. No. 1125, the whole 30-day period to appeal having begun to run again from
notice of the denial of petitioner's motion for reconsideration.

WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February
12, 1986 which affirmed the denial by respondent Commissioner of Internal Revenue of
petitioner Marubeni Corporation's claim for refund is hereby REVERSED. The
Commissioner of Internal Revenue is ordered to refund or grant as tax credit in favor of
petitioner the amount of P144,452.40 representing overpayment of taxes on dividends
received. No costs.

So ordered.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 195909 September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

x-----------------------x

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:

The Case
These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of
Court assailing the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En
Banc and its Resolution 2 of 1 March 2011 in CTA Case No. 6746. This Court resolves this
case on a pure question of law, which involves the interpretation of Section 27(B) vis--vis
Section 30(E) and (G) of the National Internal Revenue Code of the Philippines (NIRC), on
the income tax treatment of proprietary non-profit hospitals.

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-
profit corporation. Under its articles of incorporation, among its corporate purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian,

benevolent, charitable and scientific hospital which shall give curative, rehabilitative
and spiritual care to the sick, diseased and disabled persons; provided that purely
medical and surgical services shall be performed by duly licensed physicians and
surgeons who may be freely and individually contracted by patients;

(b) To provide a career of health science education and provide medical services to
the community through organized clinics in such specialties as the facilities and
resources of the corporation make possible;

(c) To carry on educational activities related to the maintenance and promotion of

health as well as provide facilities for scientific and medical researches which, in the
opinion of the Board of Trustees, may be justified by the facilities, personnel, funds,
or other requirements that are available;

(d) To cooperate with organized medical societies, agencies of both government and
private sector; establish rules and regulations consistent with the highest
professional ethics;

xxxx3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's
deficiency taxes amounting to P76,063,116.06 for 1998, comprised of deficiency income
tax, value-added tax, withholding tax on compensation and expanded withholding tax. The
BIR reduced the amount to P63,935,351.57 during trial in the First Division of the CTA. 4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the
deficiency tax assessments. The BIR did not act on the protest within the 180-day period
under Section 228 of the NIRC. Thus, St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary non-profit hospitals, should be applicable
to St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is a new provision
intended to amend the exemption on non-profit hospitals that were previously categorized
as non-stock, non-profit corporations under Section 26 of the 1997 Tax Code x x x." 5 It is a
specific provision which prevails over the general exemption on income tax granted under
Section 30(E) and (G) for non-stock, non-profit charitable institutions and civic organizations
promoting social welfare. 6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13%
of its revenues came from charitable purposes. Moreover, the hospital's board of trustees,
officers and employees directly benefit from its profits and assets. St. Luke's had total
revenues of P1,730,367,965 or approximately P1.73 billion from patient services in 1998. 7

St. Luke's contended that the BIR should not consider its total revenues, because its free
services to patients was P218,187,498 or 65.20% of its 1998 operating income (i.e., total
revenues less operating expenses) of P334,642,615. 8 St. Luke's also claimed that its
income does not inure to the benefit of any individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social
welfare purposes under Section 30(E) and (G) of the NIRC. It argued that the making of
profit per se does not destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before
the CTA that Section 27(B) applies to St. Luke's. The petition raises the sole issue of
whether the enactment of Section 27(B) takes proprietary non-profit hospitals out of the
income tax exemption under Section 30 of the NIRC and instead, imposes a preferential
rate of 10% on their taxable income. The BIR prays that St. Luke's be ordered to
pay P57,659,981.19 as deficiency income and expanded withholding tax for 1998 with
surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and
withholding of a part of its income, 9 as well as the payment of surcharge and delinquency
interest. There is no ground for this Court to undertake such a factual review. Under the
Constitution 10 and the Rules of Court, 11 this Court's review power is generally limited to
"cases in which only an error or question of law is involved." 12 This Court cannot depart
from this limitation if a party fails to invoke a recognized exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division
Decision dated 23 February 2009 which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY
GRANTED. Accordingly, the 1998 deficiency VAT assessment issued by respondent against
petitioner in the amount of P110,000.00 is hereby CANCELLED and WITHDRAWN.
However, petitioner is hereby ORDERED to PAY deficiency income tax and deficiency
expanded withholding tax for the taxable year 1998 in the respective amounts
of P5,496,963.54 and P778,406.84 or in the sum of P6,275,370.38, x x x.

xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency
interest on the total amount of P6,275,370.38 counted from October 15, 2003 until full
payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997.

SO ORDERED. 13

The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid, arose
from the failure of St. Luke's to prove that part of its income in 1998 (declared as "Other
Income-Net") 14 came from charitable activities. The CTA cancelled the remainder of
the P63,113,952.79 deficiency assessed by the BIR based on the 10% tax rate under
Section 27(B) of the NIRC, which the CTA En Banc held was not applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by
Section 30(E) and (G) of the NIRC. This ruling would exempt all income derived by St.
Luke's from services to its patients, whether paying or non-paying. The CTA reiterated its
earlier decision in St. Luke's Medical Center, Inc. v. Commissioner of Internal
Revenue, 16 which examined the primary purposes of St. Luke's under its articles of
incorporation and various documents 17 identifying St. Luke's as a charitable institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which
states that "a charitable institution does not lose its charitable character and its consequent
exemption from taxation merely because recipients of its benefits who are able to pay are
required to do so, where funds derived in this manner are devoted to the charitable
purposes of the institution x x x." 19 The generation of income from paying patients does not
per se destroy the charitable nature of St. Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal
Revenue, 20 which ruled that the old NIRC (Commonwealth Act No. 466, as
amended) 21 "positively exempts from taxation those corporations or associations which,
otherwise, would be subject thereto, because of the existence of x x x net income." 22 The
NIRC of 1997 substantially reproduces the provision on charitable institutions of the old
NIRC. Thus, in rejecting the argument that tax exemption is lost whenever there is net
income, the Court in Jesus Sacred Heart College declared: "[E]very responsible
organization must be run to at least insure its existence, by operating within the limits of its
own resources, especially its regular income. In other words, it should always strive,
whenever possible, to have a surplus." 23

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The
CTA explained that to apply the 10% preferential rate, Section 27(B) requires a hospital to
be "non-profit." On the other hand, Congress specifically used the word "non-stock" to
qualify a charitable "corporation or association" in Section 30(E) of the NIRC. According to
the CTA, this is unique in the present tax code, indicating an intent to exempt this type of
charitable organization from income tax. Section 27(B) does not require that the hospital be
"non-stock." The CTA stated, "it is clear that non-stock, non-profit hospitals operated
exclusively for charitable purpose are exempt from income tax on income received by them
as such, applying the provision of Section 30(E) of the NIRC of 1997, as amended." 25

The Issue
The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on the income of
proprietary non-profit hospitals.

The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960
because the petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court,
"[t]he petition shall raise only questions of law which must be distinctly set forth." St. Luke's
cites Martinez v. Court of Appeals 26 which permits factual review "when the Court of
Appeals [in this case, the CTA] manifestly overlooked certain relevant facts not disputed by
the parties and which, if properly considered, would justify a different conclusion." 27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that
the CTA "disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-
serving, to show the nature of the 'Other Income-Net' x x x." 28 This is not a case of
overlooking or failing to consider relevant evidence. The CTA obviously considered the
evidence and concluded that it is self-serving. The CTA declared that it has "gone through
the records of this case and found no other evidence aside from the self-serving affidavit
executed by [the] witnesses [of St. Luke's] x x x." 29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25%
surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax
within the time prescribed for its payment in the notice of assessment[.]" 30 St. Luke's is also
liable to pay 20% delinquency interest under Section 249(C)(3) of the NIRC. 31 As explained
by the CTA En Banc, the amount of P6,275,370.38 in the dispositive portion of the CTA First
Division Decision includes only deficiency interest under Section 249(A) and (B) of the
NIRC and not delinquency interest. 32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of
Section 27(B) in the NIRC of 1997 vis--vis Section 30(E) and (G) on the income tax
exemption of charitable and social welfare institutions. The 10% income tax rate under
Section 27(B) specifically pertains to proprietary educational institutions and proprietary
non-profit hospitals. The BIR argues that Congress intended to remove the exemption that
non-profit hospitals previously enjoyed under Section 27(E) of the NIRC of 1977, which is
now substantially reproduced in Section 30(E) of the NIRC of 1997. 33 Section 27(B) of the
present NIRC provides:

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions

and hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable
income except those covered by Subsection (D) hereof: Provided, That if the gross income
from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross
income derived by such educational institutions or hospitals from all sources, the tax
prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For
purposes of this Subsection, the term 'unrelated trade, business or other activity' means any
trade, business or other activity, the conduct of which is not substantially related to the
exercise or performance by such educational institution or hospital of its primary purpose or
function. A 'proprietary educational institution' is any private school maintained and
administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher
Education (CHED), or the Technical Education and Skills Development Authority (TESDA),
as the case may be, in accordance with existing laws and regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it
is a charitable institution and an organization promoting social welfare. The arguments of St.
Luke's focus on the wording of Section 30(E) exempting from income tax non-stock, non-
profit charitable institutions. 34 St. Luke's asserts that the legislative intent of introducing
Section 27(B) was only to remove the exemption for "proprietary non-profit" hospitals. 35 The
relevant provisions of Section 30 state:

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be
taxed under this Title in respect to income received by them as such:

xxxx

(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no
part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person;

xxxx

(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or personal,
or from any of their activities conducted for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code. (Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that
Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-
profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E)
and (G) on the other hand, can be construed together without the removal of such tax
exemption. The effect of the introduction of Section 27(B) is to subject the taxable income of
two specific institutions, namely, proprietary non-profit educational institutions 36 and
proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10%
preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the
last paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The
only qualifications for hospitals are that they must be proprietary and non-profit.
"Proprietary" means private, following the definition of a "proprietary educational institution"
as "any private school maintained and administered by private individuals or groups" with a
government permit. "Non-profit" means no net income or asset accrues to or benefits any
member or specific person, with all the net income or asset devoted to the institution's
purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club
Filipino Inc. de Cebu, 37this Court considered as non-profit a sports club organized for
recreation and entertainment of its stockholders and members. The club was primarily
funded by membership fees and dues. If it had profits, they were used for overhead
expenses and improving its golf course. 38 The club was non-profit because of its purpose
and there was no evidence that it was engaged in a profit-making enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable.
The Court defined "charity" in Lung Center of the Philippines v. Quezon City 40 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 [by] otherwise lessening the burden of
government." 41 A non-profit club for the benefit of its members fails this test. An
organization may be considered as non-profit if it does not distribute any part of its income
to stockholders or members. However, despite its being a tax exempt institution, any
income such institution earns from activities conducted for profit is taxable, as expressly
provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of

charity in Lung Center. The issue in Lung Center concerns exemption from real property tax
and not income tax. However, it provides for the test of charity in our jurisdiction. Charity is
essentially a gift to an indefinite number of persons which lessens the burden of
government. In other words, charitable institutions provide for free goods and services to
the public which would otherwise fall on the shoulders of government. Thus, as a matter of
efficiency, the government forgoes taxes which should have been spent to address public
needs, because certain private entities already assume a part of the burden. This is the
rationale for the tax exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public works which would have been
funded by appropriations from the Treasury. 42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax exemptions,
subject to the constitutional provision that "[n]o law granting any tax exemption shall be
passed without the concurrence of a majority of all the Members of Congress." 43 The
requirements for a tax exemption are strictly construed against the taxpayer 44 because an
exemption restricts the collection of taxes necessary for the existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable
institution for the purpose of exemption from real property taxes. This ruling uses the same
premise as Hospital de San Juan 45 and Jesus Sacred Heart College 46 which says that
receiving income from paying patients does not destroy the charitable nature of a hospital.

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. 47

For real property taxes, the incidental generation of income is permissible because the test
of exemption is the use of the property. The Constitution provides that "[c]haritable
institutions, churches and personages 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." 48 The
test of exemption is not strictly a requirement on the intrinsic nature or character of the
institution. The test requires that the institution use the property in a certain way, i.e. for a
charitable purpose. Thus, the Court held that the Lung Center of the Philippines did not lose
its charitable character when it used a portion of its lot for commercial purposes. The effect
of failing to meet the use requirement is simply to remove from the tax exemption that
portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC,
Congress decided to extend the exemption to income taxes. However, the way Congress
crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the
Constitution. Section 30(E) of the NIRC defines the corporation or association that is
exempt from income tax. On the other hand, Section 28(3), Article VI of the Constitution
does not define a charitable institution, but requires that the institution "actually, directly and
exclusively" use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted
"exclusively" for charitable purposes. The organization of the institution refers to its
corporate form, as shown by its articles of incorporation, by-laws and other constitutive
documents. Section 30(E) of the NIRC specifically requires that the corporation or
association be non-stock, which is defined by the Corporation Code as "one where no part
of its income is distributable as dividends to its members, trustees, or officers" 49 and that
any profit "obtain[ed] as an incident to its operations shall, whenever necessary or proper,
be used for the furtherance of the purpose or purposes for which the corporation was
organized." 50 However, under Lung Center, any profit by a charitable institution must not
only be plowed back "whenever necessary or proper," but must be "devoted or used
altogether to the charitable object which it is intended to achieve." 51

The operations of the charitable institution generally refer to its regular activities. Section
30(E) of the NIRC requires that these operations be exclusive to charity. There is also a
specific requirement that "no part of [the] net income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any specific person." The use of lands, buildings
and improvements of the institution is but a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke's from paying taxes. This
only refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a
charitable institution is not ipso facto tax exempt. To be exempt from real property taxes,
Section 28(3), Article VI of the Constitution requires that a charitable institution use the
property "actually, directly and exclusively" for charitable purposes. To be exempt from
income taxes, Section 30(E) of the NIRC requires that a charitable institution must be
"organized and operated exclusively" for charitable purposes. Likewise, to be exempt from
income taxes, Section 30(G) of the NIRC requires that the institution be "operated
exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and
operated exclusively" by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or personal,
or from any of their activities conducted for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution
conducts "any" activity for profit, such activity is not tax exempt even as its not-for-profit
activities remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that
the "[n]on-stock corporation or association [must be] organized and operated exclusively for
x x x charitable x x x purposes x x x." It likewise qualifies the requirement in Section 30(G)
that the civic organization must be "operated exclusively" for the promotion of social
welfare.

Thus, even if the charitable institution must be "organized and operated exclusively" for
charitable purposes, it is nevertheless allowed to engage in "activities conducted for profit"
without losing its tax exempt status for its not-for-profit activities. The only consequence is
that the "income of whatever kind and character" of a charitable institution "from any of its
activities conducted for profit, regardless of the disposition made of such income, shall be
subject to tax." Prior to the introduction of Section 27(B), the tax rate on such income from
for-profit activities was the ordinary corporate rate under Section 27(A). With the
introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It
cannot be disputed that a hospital which receives approximately P1.73 billion from paying
patients is not an institution "operated exclusively" for charitable purposes. Clearly,
revenues from paying patients are income received from "activities conducted for
profit." 52 Indeed, St. Luke's admits that it derived profits from its paying patients. St. Luke's
declared P1,730,367,965 as "Revenues from Services to Patients" in contrast to its "Free
Services" expenditure of P218,187,498. In its Comment in G.R. No. 195909, St. Luke's
showed the following "calculation" to support its claim that 65.20% of its "income after
expenses was allocated to free or charitable services" in 1998. 53

REVENUES FROM SERVICES TO PATIENTS P1,730,367,965.00

OPERATING EXPENSES

Professional care of patients P1,016,608,394.00

Administrative 287,319,334.00

Household and Property 91,797,622.00

P1,395,725,350.00

INCOME FROM OPERATIONS P334,642,615.00 100%

Free Services -218,187,498.00 -65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES P116,455,117.00 34.80%

OTHER INCOME 17,482,304.00

EXCESS OF REVENUES OVER EXPENSES P133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" 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." x x x The words "dominant use" or "principal use" cannot be
substituted for the words "used exclusively" without doing violence to the Constitution and
the law. Solely is synonymous with exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without violating
the NIRC. Services to paying patients are activities conducted for profit. They cannot be
considered any other way. There is a "purpose to make profit over and above the cost" of
services. 55 The P1.73 billion total revenues from paying patients is not even incidental to St.
Luke's charity expenditure of P218,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating
income in 1998. However, if a part of the remaining 34.80% of the operating income is
reinvested in property, equipment or facilities used for services to paying and non-paying
patients, then it cannot be said that the income is "devoted or used altogether to the
charitable object which it is intended to achieve." 56 The income is plowed back to the
corporation not entirely for charitable purposes, but for profit as well. In any case, the last
paragraph of Section 30 of the NIRC expressly qualifies that income from activities for profit
is taxable "regardless of the disposition made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining
the phrase "any activity conducted for profit." However, it quoted a deposition of Senator
Mariano Jesus Cuenco, who was a member of the Committee of Conference for the
Senate, which introduced the phrase "or from any activity conducted for profit."

P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no cree Vd.
que es una actividad esencial dicho hospital para el funcionamiento del colegio de medicina
de dicha universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero

considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van
enfermos de buena posicin social econmica, lo que se paga por estos enfermos debe
estar sujeto a 'income tax', y es una de las razones que hemos tenido para insertar las
palabras o frase 'or from any activity conducted for profit.' 57

The question was whether having a hospital is essential to an educational institution like the
College of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the
hospital has paid rooms generally occupied by people of good economic standing, then it
should be subject to income tax. He said that this was one of the reasons Congress
inserted the phrase "or any activity conducted for profit."

The question in Jesus Sacred Heart College involves an educational institution. 58 However,
it is applicable to charitable institutions because Senator Cuenco's response shows an
intent to focus on the activities of charitable institutions. Activities for profit should not
escape the reach of taxation. Being a non-stock and non-profit corporation does not, by this
reason alone, completely exempt an institution from tax. An institution cannot use its
corporate form to prevent its profitable activities from being taxed.
The Court finds that St. Luke's is a corporation that is not "operated exclusively" for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict interpretation of a provision granting tax
exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and
(G) of the NIRC requires that an institution be "operated exclusively" for charitable or social
welfare purposes to be completely exempt from income tax. An institution under Section
30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities.
Such income from for-profit activities, under the last paragraph of Section 30, is merely
subject to income tax, previously at the ordinary corporate rate but now at the preferential
10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt
institution is spared from sharing in the expenses of government and yet benefits from
them. Tax exemptions for charitable institutions should therefore be limited to institutions
beneficial to the public and those which improve social welfare. A profit-making entity should
not be allowed to exploit this subsidy to the detriment of the government and other
taxpayers.1wphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to
its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's,
as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net
income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the
NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the
BIR, which opined that St. Luke's is "a corporation for purely charitable and social welfare
purposes"59 and thus exempt from income tax. 60 In Michael J. Lhuillier, Inc. v.
Commissioner of Internal Revenue, 61 the Court said that "good faith and honest belief that
one is not subject to tax on the basis of previous interpretation of government agencies
tasked to implement the tax law, are sufficient justification to delete the imposition of
surcharges and interest." 62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is
PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November
2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St.
Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based
on the 10% preferential income tax rate under Section 27(B) of the National Internal
Revenue Code. However, it is not liable for surcharges and interest on such deficiency
income tax under Sections 248 and 249 of the National Internal Revenue Code. All other
parts of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating
Section 1, Rule 45 of the Rules of Court.

SO ORDERED.
 EN BANC

G.R. No. 215427 December 10, 2014

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

vs.
THE BUREAU OF INTERNAL REVENUE, represented by JOSE MARIO BUNAG, in his
capacity as Commissioner of the Bureau of Internal Revenue, and JOHN DOE and
JANE DOE, who are Promulgated: persons acting for, in behalf or under the authority
of respondent, Respondents.

DECISION

PERALTA, J.:

The present petition stems from the Motion for Clarification filed by petitioner Philippine
Amusement and Gaming Corporation (PAGCOR) on September 13, 2013 in the case
entitled Philippine Amusement and Gaming Corporation (PAGCOR) v. The Bureau of
Internal Revenue, et al., which was promulgated on March 15, 2011. The Motion for
1

Clarification essentially prays for the clarification of our Decision in the aforesaid case, as
well the issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction
against the Bureau of Internal Revenue (BIR), their employees, agents and any other
persons or entities acting or claiming any right on BIRs behalf, in the implementation of BIR
Revenue Memorandum Circular (RMC) No. 33-2013 dated April 17, 2013.

At the onset, it bears stressing that while the instant motion was denominated as a "Motion
for Clarification," in the session of the Court En Bancheld on November 25, 2014, the
members thereof ruled to treat the same as a new petition for certiorari under Rule 65 of the
Rules of Court, given that petitioner essentially alleges grave abuse of discretion on the part
of the BIR amounting to lack or excess of jurisdiction in issuing RMC No. 33-2013.
Consequently, a new docket number has been assigned thereto, while petitioner has been
ordered to pay the appropriate docket fees pursuant to the Resolution dated November
25,2014, the pertinent portion of which reads:

G.R. No. 172087 (Philippine Amusement and Gaming Corporation vs. Bureau of Internal
Revenue, et al.). The Court Resolved to

(a) TREAT as a new petition the Motion for Clarification with Temporary Restraining
Order and/or Preliminary Injunction Application dated September 6, 2013 filed by
PAGCOR;

(b) DIRECT the Judicial Records Office to RE-DOCKET the aforesaid Motion for
Clarification, subject to payment of the appropriate docket fees; and

(c) REQUIRE petitioner PAGCOR to PAY the filing fees for the subject Motion for
Clarification within five (5) days from notice hereof. Brion, J., no part and on leave.
Perlas-Bernabe, J., on official leave.

Considering that the parties havefiled their respective pleadings relative to the instant
petition, and the appropriate docket fees have been duly paid by petitioner, this Court
considers the instant petition submitted for resolution.

The facts are briefly summarized as follows:

On April 17, 2006, petitioner filed before this Court a Petition for Review on Certiorari and
Prohibition (With Prayer for the Issuance of a Temporary Restraining Order and/or
Preliminary Injunction) seeking the declaration of nullity of Section 1 of Republic Act
2

(R.A.)No. 9337 insofar as it amends Section 27(C) of R.A. No. 8424, otherwise known as
3 4 5

the National Internal Revenue Code (NIRC) by excluding petitioner from the enumeration of
government-owned or controlled corporations (GOCCs) exempted from liability for
corporate income tax.
On March 15, 2011, this Court rendered a Decision granting in part the petition filed by
6

petitioner. Its fallo reads:

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337,
amending Section 27(c) of the National Internal Revenue Code of 1997, by excluding
petitioner Philippine Amusement and Gaming Corporation from the enumeration of
government-owned and controlled corporations exempted from corporate income tax is
valid and constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it subjects
PAGCOR to 10% VAT is null and void for being contrary to the National Internal Revenue
Code of 1997, as amended by Republic Act No. 9337.

No costs.

SO ORDERED. 7

Both petitioner and respondent filed their respective motions for partial reconsideration, but
the samewere denied by this Court in a Resolution dated May 31, 2011.
8

Resultantly, respondent issued RMC No. 33-2013 on April 17, 2013 pursuant to the
Decision dated March 15, 2011 and the Resolution dated May 31, 2011, which clarifies the
"Income Tax and Franchise Tax Due from the Philippine Amusement and Gaming
Corporation (PAGCOR), its Contractees and Licensees." Relevant portions thereof state:

II. INCOME TAX

Pursuant to Section 1 of R.A.9337, amending Section 27(C) of the NIRC, as amended,

PAGCOR is no longer exempt from corporate income tax as it has been effectively omitted
from the list of government-owned or controlled corporations (GOCCs) that are exempt from
income tax. Accordingly, PAGCORs income from its operations and licensing of gambling
casinos, gaming clubs and other similar recreation or amusement places, gaming pools,
and other related operations, are subject to corporate income tax under the NIRC, as
amended. This includes, among others:

a) Income from its casino operations;

b) Income from dollar pit operations;

c) Income from regular bingo operations; and

d) Income from mobile bingo operations operated by it, with agents on commission
basis. Provided, however, that the agents commission income shall be subject to
regular income tax, and consequently, to withholding tax under existing regulations.
Income from "other related operations" includes, butis not limited to:

a) Income from licensed private casinos covered by authorities to operate issued to

private operators;

b) Income from traditional bingo, electronic bingo and other bingo variations covered
by authorities to operate issued to private operators;

c) Income from private internet casino gaming, internet sports betting and private
mobile gaming operations;

d) Income from private poker operations;

e) Income from junket operations;

f) Income from SM demo units; and

g) Income from other necessary and related services, shows and entertainment.

PAGCORs other income that is not connected with the foregoing operations are likewise
subject to corporate income tax under the NIRC, as amended.

PAGCORs contractees and licensees are entities duly authorized and licensed by
PAGCOR to perform gambling casinos, gaming clubs and other similar recreation or
amusement places, and gaming pools. These contractees and licensees are subject to
income tax under the NIRC, as amended.

III. FRANCHISE TAX

Pursuant to Section 13(2) (a) of P.D. No. 1869, PAGCOR is subject to a franchise tax of five
9

percent (5%) of the gross revenue or earnings it derives from its operations and licensing of
gambling casinos, gaming clubs and other similar recreation or amusement places, gaming
pools, and other related operations as described above.

On May 20, 2011, petitioner wrote the BIR Commissioner requesting for reconsideration of
the tax treatment of its income from gaming operations and other related operations under
RMC No. 33-2013. The request was, however, denied by the BIR Commissioner.

On August 4, 2011, the Decision dated March 15, 2011 became final and executory and
was, accordingly, recorded in the Book of Entries of Judgment. 10
Consequently, petitioner filed a Motion for Clarification alleging that RMC No. 33-2013 is an
erroneous interpretation and application of the aforesaid Decision, and seeking clarification
with respect to the following:

1. Whether PAGCORs tax privilege of paying 5% franchise tax in lieu of all other
taxes with respect toits gaming income, pursuant to its Charter P.D. 1869, as
amended by R.A. 9487, is deemed repealed or amended by Section 1 (c) of R.A.
9337.

2. If it is deemed repealed or amended, whether PAGCORs gaming income is

subject to both 5% franchise tax and income tax.

3. Whether PAGCORs income from operation of related services is subject to both

income tax and 5% franchise tax.

4. Whether PAGCORs tax privilege of paying 5% franchise tax inures to the benefit
of third parties with contractual relationship with PAGCOR in connection with the
operation of casinos.11

In our Decision dated March 15, 2011, we have already declared petitioners income tax
liability in view of the withdrawal of its tax privilege under R.A. No. 9337. However, we made
no distinction as to which income is subject to corporate income tax, considering that the
issue raised therein was only the constitutionality of Section 1 of R.A. No. 9337, which
excluded petitioner from the enumeration of GOCCs exempted from corporate income tax.

For clarity, it is worthy to note that under P.D. 1869, as amended, PAGCORs income is
classified into two: (1) income from its operations conducted under its Franchise, pursuant
to Section 13(2) (b) thereof (income from gaming operations); and (2) income from its
operation of necessary and related services under Section 14(5) thereof (income from other
related services). In RMC No. 33-2013, respondent further classified the aforesaid income
as follows:

1. PAGCORs income from its operations and licensing of gambling casinos, gaming clubs
and other similar recreation or amusement places, gaming pools, includes, among others:

(a) Income from its casino operations;

(b) Income from dollar pit operations;

(c) Income from regular bingo operations; and

 (d) Income from mobile bingo operations operated by it, with agents on commission
basis. Provided, however, that the agents commission income shall be subject to
regular income tax, and consequently, to withholding tax under existing regulations.

2. Income from "other related operations"includes, but is not limited to:

(a) Income from licensed private casinos covered by authorities to operate issued to
private operators;

(b) Income from traditional bingo, electronic bingo and other bingo variations covered
by authorities to operate issued to private operators;

(c) Income from private internet casino gaming, internet sports betting and private
mobile gaming operations;

(d) Income from private poker operations;

(e) Income from junket operations;

(f) Income from SM demo units; and

(g) Income from other necessary and related services, shows and entertainment. 12

After a thorough study of the arguments and points raised by the parties, and in accordance
with our Decision dated March 15, 2011, we sustain petitioners contention that its income
from gaming operations is subject only to five percent (5%) franchise tax under P.D. 1869,
as amended, while its income from other related services is subject to corporate income tax
pursuant to P.D. 1869, as amended, as well as R.A. No. 9337. This is demonstrable.

First. Under P.D. 1869, as amended, petitioner is subject to income tax only with respect to
its operation of related services. Accordingly, the income tax exemption ordained under
Section 27(c) of R.A. No. 8424 clearly pertains only to petitionersincome from operation of
related services. Such income tax exemption could not have been applicable to petitioners
income from gaming operations as it is already exempt therefrom under P.D. 1869, as
amended, to wit: SECTION 13. Exemptions.

xxxx

(2) Income and other taxes. (a) Franchise Holder: No tax of any kind or form, income or
otherwise, as well as fees, charges or levies of whatever nature, whether National or Local,
shall be assessed and collected under this Franchise from the Corporation; nor shall any
form of tax or charge attach in any way to the earnings of the Corporation, except a
Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the
Corporation from its operation under this Franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established or collected by any
municipal, provincial, or national government authority.13

Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or
entity involved is subject to tax. This is the most sound and logical interpretation because
petitioner could not have been exempted from paying taxes which it was not liable to pay in
the first place. This is clear from the wordings of P.D. 1869, as amended, imposing a
franchise tax of five percent (5%) on its gross revenue or earnings derived by petitioner
from its operation under the Franchise in lieuof all taxes of any kind or form, as well as fees,
charges or leviesof whatever nature, which necessarily include corporate income tax.

In other words, there was no need for Congress to grant tax exemption to petitioner with
respect to its income from gaming operations as the same is already exempted from all
taxes of any kind or form, income or otherwise, whether national or local, under its Charter,
save only for the five percent (5%) franchise tax. The exemption attached to the income
from gaming operations exists independently from the enactment of R.A. No. 8424. To
adopt an assumption otherwise would be downright ridiculous, if not deleterious, since
petitioner would be in a worse position if the exemption was granted (then withdrawn) than
when it was not granted at all in the first place.

Moreover, as may be gathered from the legislative records of the Bicameral Conference
Meeting of the Committee on Ways and Means dated October 27, 1997, the exemption of
petitioner from the payment of corporate income tax was due to the acquiescence of the
Committee on Ways and Means to the request of petitioner that it be exempt from such tax.
Based on the foregoing, it would be absurd for petitioner to seek exemption from income tax
on its gaming operations when under its Charter, it is already exempted from paying the
same.

Second. Every effort must be exerted to avoid a conflict between statutes; so that if
reasonable construction is possible, the laws must be reconciled in that manner. 14

As we see it, there is no conflict between P.D. 1869, as amended, and R.A. No. 9337. The
former lays down the taxes imposable upon petitioner, as follows: (1) a five percent (5%)
franchise tax of the gross revenues or earnings derived from its operations conducted under
the Franchise, which shall be due and payable in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established or collected by any
municipal, provincial or national government authority; (2) income tax for income realized
15

from other necessary and related services, shows and entertainment of petitioner. With the
16

enactment of R.A. No. 9337, which withdrew the income tax exemption under R.A. No.
8424, petitioners tax liability on income from other related services was merely reinstated.
It cannot be gain said, therefore, that the nature of taxes imposable is well defined for each
kind of activity oroperation. There is no inconsistency between the statutes; and in fact, they
complement each other.

Third. Even assuming that an inconsistency exists, P.D. 1869, as amended, which expressly
provides the tax treatment of petitioners income prevails over R.A. No. 9337, which is a
general law. It is a canon of statutory construction that a special law prevails over a general
law regardless of their dates of passage and the special is to be considered as
remaining an exception to the general. The rationale is:
17

Why a special law prevails over a general law has been put by the Court as follows: x x x x

x x x The Legislature consider and make provision for all the circumstances of the particular
case. The Legislature having specially considered all of the facts and circumstances in the
particular case in granting a special charter, it will not be considered that the Legislature, by
adopting a general law containing provisions repugnant to the provisions of the charter, and
without making any mention of its intention to amend or modify the charter, intended to
amend, repeal, or modify the special act. (Lewis vs. Cook County, 74 I11. App., 151;
Philippine Railway Co. vs. Nolting 34 Phil., 401.) 18

Where a general law is enacted to regulate an industry, it is common for individual

franchises subsequently granted to restate the rights and privileges already mentioned in
the general law, or to amend the later law, as may be needed, to conform to the general
law. However, if no provision or amendment is stated in the franchise to effect the
19

provisions of the general law, it cannot be said that the same is the intent of the lawmakers,
for repeal of laws by implication is not favored.
20

In this regard, we agree with petitioner that if the lawmakers had intended to withdraw
petitioners tax exemption of its gaming income, then Section 13(2)(a) of P.D. 1869 should
have been amended expressly in R.A. No. 9487, or the same, at the very least, should have
been mentioned in the repealing clause of R.A. No. 9337. However, the repealing clause
21

never mentioned petitioners Charter as one of the laws being repealed. On the other hand,
the repeal of other special laws, namely, Section 13 of R.A. No. 6395 as well as Section 6,
fifth paragraph of R.A. No. 9136, is categorically provided under Section 24 (a) (b) of R.A.
No. 9337, to wit:

SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed
and the persons and/or transactions affected herein are made subject to the value-added
tax subject to the provisions of Title IV of the National Internal Revenue Code of 1997, as
amended:

(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of the
National Power Corporation (NPC);
 (B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the
sales of generated power by generation companies; and

(C) All other laws, acts, decrees, executive orders, issuances and rules and
regulations or parts thereof which are contrary to and inconsistent with any
provisions of this Act are hereby repealed, amended or modified accordingly. 22

When petitioners franchise was extended on June 20, 2007 without revoking or
withdrawing itstax exemption, it effectively reinstated and reiterated all of petitioners rights,
privileges and authority granted under its Charter. Otherwise, Congress would have
painstakingly enumerated the rights and privileges that it wants to withdraw, given that a
franchise is a legislative grant of a special privilege to a person. Thus, the extension of
petitioners franchise under the sameterms and conditions means a continuation of its tax
exempt status with respect to its income from gaming operations. Moreover, all laws, rules
and regulations, or parts thereof, which are inconsistent with the provisions ofP.D. 1869, as
amended, a special law, are considered repealed, amended and modified, consistent with
Section 2 of R.A. No. 9487, thus:

SECTION 2. Repealing Clause. All laws, decrees, executive orders, proclamations, rules
and regulations and other issuances, or parts thereof, which are inconsistent with the
provisions of this Act, are hereby repealed, amended and modified.

It is settled that where a statute is susceptible of more than one interpretation, the court
should adopt such reasonable and beneficial construction which will render the provision
thereof operative and effective, as well as harmonious with each other. 23

Given that petitioners Charter is notdeemed repealed or amended by R.A. No. 9337,
petitioners income derived from gaming operations is subject only to the five percent
(5%)franchise tax, in accordance with P.D. 1869, as amended. With respect to petitioners
income from operation of other related services, the same is subject to income tax only. The
five percent (5%) franchise tax finds no application with respect to petitioners income from
other related services, inview of the express provision of Section 14(5) of P.D. 1869, as
amended, to wit:

Section 14. Other Conditions.

xxxx

(5) Operation of related services. The Corporation is authorized to operate such

necessary and related services, shows and entertainment. Any income that may be realized
from these related services shall not be included as part of the income of the Corporation
for the purpose of applying the franchise tax, but the same shall be considered as a
separate income of the Corporation and shall be subject to income tax. 24
Thus, it would be the height of injustice to impose franchise tax upon petitioner for its
income from other related services without basis therefor.

For proper guidance, the first classification of PAGCORs income under RMC No. 33-2013
(i.e., income from its operations and licensing of gambling casinos, gaming clubs and other
similar recreation or amusement places, gambling pools) should be interpreted in relation to
Section 13(2) of P.D. 1869, which pertains to the income derived from issuing and/or
granting the license to operate casinos to PAGCORs contractees and licensees, as well as
earnings derived by PAGCOR from its own operations under the Franchise. On the other
hand, the second classification of PAGCORs income under RMC No. 33-2013 (i.e., income
from other related operations) should be interpreted in relation to Section 14(5) of P.D.
1869, which pertains to income received by PAGCOR from its contractees and licensees in
the latters operation of casinos, as well as PAGCORs own income from operating
necessary and related services, shows and entertainment.

As to whether petitioners tax privilege of paying five percent (5%) franchise tax inures to
the benefit of third parties with contractual relationship with petitioner in connection with the
operation of casinos, we find no reason to rule upon the same. The resolution of the instant
petition is limited to clarifying the tax treatment of petitioners income vis--visour Decision
dated March 15, 2011. This Decision is not meant to expand our original Decision by delving
into new issues involving petitioners contractees and licensees. For one, the latter are not
parties to the instant case, and may not therefore stand to benefit or bear the consequences
of this resolution. For another, to answer the fourth issue raised by petitioner relative to its
contractees and licensees would be downright premature and iniquitous as the same would
effectively countenance sidesteps to judicial process.

In view of the foregoing disquisition, respondent, therefore, committed grave abuse of

discretion amounting to lack of jurisdiction when it issued RMC No. 33-2013 subjecting both
income from gaming operations and other related services to corporate income tax and five
percent (5%) franchise tax. This unduly expands our Decision dated March 15, 2011
1wphi1

without due process since the imposition creates additional burden upon petitioner. Such
act constitutes an overreach on the part of the respondent, which should be immediately
struck down, lest grave injustice results. More, it is settled that in case of discrepancy
between the basic law and a rule or regulation issued to implement said law, the basic law
prevails, because the said rule or regulation cannot go beyond the terms and provisions of
the basic law.

In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337, amending Section 27(c)
of R.A. No. 8424, by excluding petitioner from the enumeration of GOCCs exempted from
corporate income tax, is valid and constitutional. In addition, we hold that:
 1. Petitioners tax privilege of paying five percent (5%) franchise tax in lieu of all
other taxes with respect to its income from gaming operations, pursuant to P.D.
1869, as amended, is not repealed or amended by Section l(c) ofR.A. No. 9337;

2. Petitioner's income from gaming operations is subject to the five percent (5%)
franchise tax only; and

3. Petitioner's income from other related services is subject to corporate income tax
only.

In view of the above-discussed findings, this Court ORDERS the respondent to cease and
desist the implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income
tax on petitioner's income derived from its gaming operations; and (2) franchise tax on
petitioner's income from other related services.

WHEREFORE, the Petition is hereby GRANTED. Accordingly, respondent is ORDERED to

cease and desist the implementation of RMC No. 33-2013 insofar as it imposes: (1)
corporate income tax on petitioner's income derived from its gaming operations; and (2)
franchise tax on petitioner's income from other related services.

SO ORDERED.

EN BANC
[G.R. No. L-9276. October 23, 1956.]
THE COLLECTOR OF INTERNAL REVENUE, Petitioner, vs. V. G. SINCO
EDUCATIONAL CORPORATION, Respondent.

DECISION
BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of Tax Appeals which orders the Collector
of Internal Revenue to refund to Respondent-Appellee the sum of P5,364.77
representing income tax paid by said Appellee for the years 1950 and 1951.
In June, 1949, Vicente G. Sinco established and operated an educational institution
known as Foundation College of Dumaguete. Sinco would have continued operating
said college were it not for the requirement of the Department of Education that as far
as practicable schools and colleges recognized by the government should be
incorporated, and so on September 21, 1951, the V. G. Sinco Educational Institution
was organized. This corporation was non-stock and was capitalized by V. G. Sinco and
members of his immediate family. This corporation continued the operations of
Foundation College of Dumaguete. Since its operation, this college derived, by way of
tuition fees, the following yearly gross profits:
Year Gross Receipt
1949 P32,684.70
1950 88,341.80
1951 114,499.35
1952 83,259.04
1953 97,907.18
The investigation conducted by an income tax examiner of the Bureau of Internal
Revenue revealed that the college realized a taxable net income for the year 1949 in
the sum of P3,098.06 and for the year 1950 in the sum of P17,038.59. For the years
1951 to 1953, inclusive, the income tax returns of the college have not as yet been
verified but it reported a taxable net profit of P26,868.60 for the year 1951; a loss of
P9,129.80 for the year 1952 and a profit of P223.56 for the year 1953. The Collector of
Internal Revenue assessed against the college an income tax for the years 1950 and
1951 in the aggregate sum of P5,364.77, which was paid by the college. Two years
thereafter, the corporation commenced an action in the Court of First Instance of Negros
Oriental for the refund of this amount alleging that it is exempt from income tax under
section 27 (e) of the National Internal Revenue Code. Pursuant to the provisions of
Republic Act 1125, the case was remanded to the Court of Tax Appeals which, after due
trial, decided the case in favor of the corporation.
Invoking section 27 (e) of the National Internal Revenue Code, the Appellee claims that
it is exempt from the payment of the income tax because it is organized and maintained
exclusively for the educational purposes and no part of its net income inures to the
benefit of any private individual. On the other hand, the Appellant maintains that part of
the net income accumulated by the Appellee inured to the benefit of V. G. Sinco,
president and founder of the corporation, and therefore the Appellee is not entitled to
the exemption prescribed by the law.
In support of his stand, Appellant invokes the yearly statements of operation or balance
sheets submitted by the corporation. Thus, in the balance sheets for the years 1951,
1952 and 1953, there appear the following entries:
1951
LIABILITIES
ACCOUNTS PAYABLE:
 Community Publishers, Inc. P20,751.95
Vicente G. Sinco, Personal 7,435.83
TOTAL LIABILITIES P28,187.78
1952
LIABILITIES.
ACCOUNTS PAYABLE
Vicente G. Sinco, Personal 12,669.07
Community Publishers, Inc. 32,135.50
TOTAL LIABILITIES P44,804.57
1953
LIABILITIES
ACCOUNTS PAYABLE:
Vicente G. Sinco, Personal
Cash Advanced P9,716.36
Accrued Salaries 7,599.71 P17,316.07
Community Publishers, Inc.
Cash Advanced P18,762.68
Printing Account 13,262.72 P32,025.40
TOTAL LIABILITIES P49,341.47
Considering the above quoted entries, Appellant claims that a great portion of the net
profits realized by the corporation was channeled and redounded to the personal benefit
of V. G. Sinco, who was its founder and president. Another benefit that accrued to Sinco
according to Appellant is represented by the several amounts which appear payable to
the Community Publishers, Inc. because, being the biggest stockholder of this entity, the
money to be paid by the Appellee to that entity as appearing in the above quoted entries
would redound to the personal benefit of Sinco.
Is it really correct to say that the Appellee is an educational institution in which part of its
income inures to the benefit of one of its stockholders as maintained by Appellant?
Considering that this claim is mainly predicated on certain entries appearing in the
balance sheets of the corporation for the years 1950 and 1951, there is need to clarify
the purposes for which said entries were made, particularly those referring to the
accounts payable to V. G. Sinco and the Community Publishers Inc.
With regard to this accounts, Dean Sinco made the following clarification: He acted as
president of the Foundation College and as chairman of its Board of Directors; yin 1949
he served as its teacher for a time; accountant of the college suggested that a certain
amount be set aside as his salary for purposes of orderly and practical accounting; but
notwithstanding this suggestion, he never collected his salary for which reason it was
carried in the books as accrued expenses. With regard to the account of the Community
Publishers, Inc., Sinco said that this is a distinct and separate corporation although he is
one of its stockholders. The account represents payment for services rendered by this
entity to the college. These are two different entities and whatever relation there is
between the two is that the former merely extends help to the latter to enable it to
comply with the requirements of the law and to fill its needs for educational purposes.
This clarification made by Sinco stand undisputed.
Considering this explanation, it is indeed too sweeping if not unfair to conclude that part
of the income of the Appellee as an institution inured to the benefit of one of its
stockholders simply because part of the income was carried in its books as
accumulated salaries of its president and teacher. Much less can it be said that the
payments made by the college to the Community Publishers, Inc. redounded to the
personal benefit of Sinco simply because he is one of its stockholders. The fact is that,
as it has been established, the Appellee is a non-profit institution and since its
organization it has never distributed any dividend or profit to its stockholders. Of course,
part of its income went to the payment of its teachers or professors and to the other
expenses of the college incident to an educational institution but none of the income has
ever been channeled to the benefit of any individual stockholder. The authorities are
clear to the effect that whatever payment is made to those who work for a school or
college as a remuneration for their services is not considered as distribution of profit as
would make the school one conducted for profit. Thus, in the case of Mayor and
Common Council of Borough of Princeton vs. State Board of Taxes & Assessments, et
al., 115 Atl., 342, wherein the principal officer of the school was formerly its owner and
principal and such principal he was given a salary for his services, the court held that
school is not conducted for profit merely because moderate salaries were paid to the
principal and to the teachers.
Of course, it is not denied that the Appellee charges tuition fees and other fees for the
different services it renders to the students and in fact it is its only source of income, but
such fact does not in itself make the school a profit-making enterprise that would place it
beyond the purview of the law. In this connection, this Court made the following
comment:
Needless to say, every responsible organization must be so run as to, at least, insure
its existence, by operating within the limits of its own resources, especially its regular
income. In other words, it should always strive, whenever possible, to have a surplus.
Upon the other hand, Appellants pretense would limit the benefits of the exemption,
under said section 27 (e), to institutions which do not hope, or propose, to have such
surplus. Under this view, the exemption would apply only to schools which are on the
verge of bankruptcy, for unlike the United States, where a substantial number of
institutions of learning are dependent upon voluntary contributions and still enjoy
economic stability, such as Harvard, the trust fund of which has been steadily increasing
with the years there are, and there have always been, very few educational
enterprises in the Philippines which are supported by donations, and these
organizations usually have a very precarious existence. The final result of Appellants
contention, if adopted, would be to discourage the establishment of colleges in the
Philippines, which is precisely the opposite of the objective consistently sought by our
laws.
Again, the amount of fees charged by a school, college or university depends,
ultimately, upon the policy and a given administration, at a particular time. It is not
conclusive of the purposes of the institution. Otherwise, such purpose would vary with
the particular persons in charge of the administration of the organization. (Jesus
Sacred Heart College vs. Collector of Internal Revenue, 95 Phil., 16)
Another point raised by Appellant to show that Appellee is not entitled to the exemption
of the law refers to the use made by it of part of its income in acquiring additional
buildings and equipment which, it is claimed would in the end redound to the benefit of
its stockholders. Appellant claims that By capitalizing its earnings in the
aforementioned manners, the value of the properties of the corporation was enhanced
and, therefore, such profits inured to the benefit of the stockholders or members. The
property of the corporation may be sold at any time and the profits thereof divided
among the stockholders or members.
This claim is too speculative. While the acquisition of additional facilities, may redound
to the benefit of the institution itself, it cannot be positively asserted that the same will
redound to the benefit of its stockholders, for no one can predict the financial condition
of the institution upon its dissolution. At any rate, it has been held by several authorities
that the mere provision for the distribution of its assets to the stockholders upon
dissolution does not remove the right of an educational institution from tax exemption.
Thus, in the case of U. S. vs. Picwick Electric Membership Corp., 158 F. 2d 272, 277, it
was held The fact that the members may receive some benefit on dissolution upon
distribution of the assets is a contingency too remote to have any material bearing upon
the question where the association is admittedly not a scheme to avoid taxation and its
good faith and honesty or purpose is not challenged.
With regard to the claim of Appellant that Appellee is not entitled to exemption because
it has not complied with the requirement of section 24, Regulation No. 2 of the
Department of Finance, we find correct the following observation of the Court of Tax
Appeals:
And regarding the proof of exemption required by section 24, Regulation No. 2,
Department of Finance which, according to the Defendant, is a condition precedent
before an educational institution can avail itself of the exemption under consideration,
we understand that it was probably promulgated for the effective enforcement of the
provisions of the Tax Code pursuant to Section 338 of the National Internal Revenue
Code. Intended to relieve the taxpayer of the duty of filing returns and paying the tax, it
cannot be said that the failure to observe the requirement called for therein constitutes a
waiver of the right to enjoy the exemption. To hold otherwise would be tantamount to
incorporating into our tax laws some legislative matter by administrative regulation.
Wherefore, the decision appealed from is affirmed, without pronouncement as to costs.
 FIRST DIVISION

[G.R. No. 124043. October 14, 1998]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF

APPEALS, COURT OF TAX APPEALS and YOUNG MENS
CHRISTIAN ASSOCIATION OF THE PHILIPPINES,
INC., respondents.

DECISION

PANGANIBAN, J.:
 Is the income derived from rentals of real property owned by the Young Mens Christian
Association of the Philippines, Inc. (YMCA) established as a welfare, educational and charitable
non-profit corporation -- subject to income tax under the National Internal Revenue Code
(NIRC) and the Constitution?

The Case

This is the main question raised before us in this petition for review
on certiorari challenging two Resolutions issued by the Court of Appeals[1] on September 28,
1995[2] and February 29, 1996[3] in CA-GR SP No. 32007. Both Resolutions affirmed the Decision
of the Court of Tax Appeals (CTA) allowing the YMCA to claim tax exemption on the latters
income from the lease of its real property.

The Facts

The Facts are undisputed.[4] Private Respondent YMCA is a non-stock, non-profit institution,
which conducts various programs and activities that are beneficial to the public, especially the
young people, pursuant to its religious, educational and charitable objectives.

In 1980, private respondent earned, among others, an income of P676,829.80 from leasing
out a portion of its premises to small shop owners, like restaurants and canteen operators,
and P44,259.00 from parking fees collected from non-members. On July 2, 1984, the
commissioner of internal revenue (CIR) issued an assessment to private respondent, in the total
amount of P415,615.01 including surcharge and interest, for deficiency income tax, deficiency
expanded withholding taxes on rentals and professional fees and deficiency withholding tax on
wages. Private respondent formally protested the assessment and, as a supplement to its basic
protest, filed a letter dated October 8, 1985. In reply, the CIR denied the claims of YMCA.

Contesting the denial of its protest, the YMCA filed a petition for review at the Court if Tax
Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the
YMCA:

xxx [T]he leasing of private respondents facilities to small shop owners, to restaurant
and canteen operators and the operation of the parking lot are reasonably incidental to
and reasonably necessary for the accomplishment of the objectives of the [private
respondents]. It appears from the testimonies of the witnesses for the [private
respondent] particularly Mr. James C. Delote, former accountant of YMCA, that these
facilities were leased to members and that they have to service the needs of its
members and their guests. The Rentals were minimal as for example, the barbershop
was only charged P300 per month. He also testified that there was actually no lot
devoted for parking space but the parking was done at the sides of the building. The
parking was primarily for members with stickers on the windshields of their cars and
they charged P.50 for non-members. The rentals and parking fees were just enough to
cover the costs of operation and maintenance only.The earning[s] from these rentals
and parking charges including those from lodging and other charges for the use of the
recreational facilities constitute [the] bulk of its income which [is] channeled to
support its many activities and attainment of its objectives. As pointed out earlier, the
membership dues are very insufficient to support its program. We find it reasonably
necessary therefore for [private respondent] to make [the] most out [of] its existing
facilities to earn some income. It would have been different if under the
circumstances, [private respondent] will purchase a lot and convert it to a parking lot
to cater to the needs of the general public for a fee, or construct a building and lease it
out to the highest bidder or at the market rate for commercial purposes, or should it
invest its funds in the buy and sell of properties, real or personal. Under these
circumstances, we could conclude that the activities are already profit oriented, not
incidental and reasonably necessary to the pursuit of the objectives of the association
and therefore, will fall under the last paragraph of section 27 of the Tax Code and any
income derived therefrom shall be taxable.

Considering our findings that [private respondent] was not engaged in the business of
operating or contracting [a] parking lot, we find no legal basis also for the imposition
of [a] deficiency fixed tax and [a] contractors tax in the amount[s] of P353.15
and P3,129.73, respectively.

xxxxxxxxx

WHEREFORE, in view of all the foregoing, the following assessments are hereby
dismissed for lack of merit:

1980 Deficiency Fixed Tax P353,15;

1980 Deficiency Contractors Tax P3,129.23;

1980 Deficiency Income Tax P372,578.20.

While the following assessments are hereby sustained:

1980 Deficiency Expanded Withholding Tax P1,798.93;

 1980 Deficiency Withholding Tax on Wages P33,058.82

plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not to
exceed three (3) years pursuant to Section 51 (e)(2) & (3) of the National Internal Revenue Code
effective as of 1984.[5]

Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In
its Decision of February 16, 1994, the CA[6] initially decided in favor of the CIR and disposed of
the appeal in the following manner:

Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and
Abra Valley College Inc. vs. Aquino, the ruling of the respondent Court of Tax
Appeals that the leasing of petitioners (herein respondent) facilities to small shop
owners, to restaurant and canteen operators and the operation of the parking lot are
reasonably incidental to and reasonably necessary for the accomplishment of the
objectives of the petitioners,' and the income derived therefrom are tax exempt, must
be reversed.

WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed

the assessment for:

1980 Deficiency Income Tax P 353.15

1980 Deficiency Contractors Tax P 3,129.23, &

1980 Deficiency Income Tax P372,578.20,

but the same is AFFIRMED in all other respect.[7]

Aggrieved, the YMCA asked for reconsideration based on the following grounds:

The findings of facts of the Public Respondent Court of Tax Appeals being
supported by substantial evidence [are] final and conclusive.

II

The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from the
income on rentals of small shops and parking fees [are] in accord with the applicable law
and jurisprudence.[8]
 Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself
and promulgated on September 28, 1995 its first assailed Resolution which, in part, reads:

The Court cannot depart from the CTAs findings of fact, as they are supported by
evidence beyond what is considered as substantial.

xxxxxxxxx

The second ground raised is that the respondent CTA did not err in saying that the
rental from small shops and parking fees do not result in the loss of the
exemption. Not even the petitioner would hazard the suggestion that YMCA is
designed for profit. Consequently, the little income from small shops and parking fees
help[s] to keep its head above the water, so to speak, and allow it to continue with its
laudable work.

The Court, therefore, finds the second ground of the motion to be meritorious and in
accord with law and jurisprudence.

WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTAs decision is
AFFIRMED in toto.[9]

The internal revenue commissioners own Motion for Reconsideration was denied by
Respondent Court in its second assailed Resolution of February 29, 1996. Hence, this petition for
review under Rule 45 of the Rules of Court.[10]

The Issues

Before us, petitioner imputes to the Court of Appeals the following errors:

In holding that it had departed from the findings of fact of Respondent Court of
Tax Appeals when it rendered its Decision dated February 16, 1994; and

II

In affirming the conclusion of Respondent Court of Tax Appeals that the income of private
respondent from rentals of small shops and parking fees [is] exempt from taxation.[11]

This Courts Ruling

 The Petition is meritorious.

First Issue:

Factual Findings of the CTA

Private respondent contends that the February 16, 1994 CA Decision reversed the factual
findings of the CTA. On the other hand, petitioner argues that the CA merely reversed
the ruling of the CTA that the leasing of private respondents facilities to small shop owners, to
restaurant and canteen operators and the operation of parking lots are reasonably incidental to
and reasonably necessary for the accomplishment of the objectives of the private respondent and
that the income derived therefrom are tax exempt. [12] Petitioner insists that what the appellate
court reversed was the legal conclusion, not the factual finding, of the CTA.[13] The commissioner
has a point.

Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by
substantial evidence, will not be disturbed on appeal unless it is shown that the said court
committed gross error in the appreciation of facts. [14] In the present case, this Court finds that the
February 16, 1994 Decision of the CA did not deviate from this rule. The latter merely applied
the law to the facts as found by the CTA and ruled on the issue raised by the CIR: Whether or not
the collection or earnings of rental income from the lease of certain premises and income earned
from parking fees shall fall under the last paragraph of Section 27 of the National Internal
Revenue Code of 1977, as amended.[15]

Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned
issue, as indeed it was expected to. That it did so in a manner different from that of the CTA did
not necessarily imply a reversal of factual findings.

The distinction between a question of law and a question of fact is clear-cut. It has been held
that [t]here is a question of law in a given case when the doubt or difference arises as to what the
law is on a certain state of facts; there is a question of fact when the doubt or difference arises as
to the truth or falsehood of alleged facts. [16] In the present case, the CA did not doubt, much less
change, the facts narrated by the CTA. It merely applied the law to the facts. That its
interpretation or conclusion is different from that of the CTA is not irregular or abnormal.

Second Issue:

Is the Rental Income of the YMCA Taxable?

We now come to the crucial issue: Is the rental income of the YMCA from its real estate
subject to tax? At the outset, we set forth the relevant provision of the NIRC:
SEC. 27. Exemptions from tax on corporations. -- The following organizations shall
not be taxed under this Title in respect to income received by them as such --

xxxxxxxxx

(g) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;

(h) Club organized and operated exclusively for pleasure, recreation, and other non-
profitable purposes, no part of the net income of which inures to the benefit of any
private stockholder or member;

xxxxxxxxx

Notwithstanding the provision in the preceding paragraphs, the income of whatever

kind and character of the foregoing organization from any of their properties, real or
personal, or from any of their activities conducted for profit, regardless of the
disposition made of such income, shall be subject to the tax imposed under this Code.
(as amended by Pres. Decree No. 1457)

Petitioners argues that while the income received by the organizations enumerated in Section
27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of tax in respect to
income received by them as such, the exemption does not apply to income derived xxx from any
if their properties, real or personal, or from any of their activities conducted for profit, regardless,
of the disposition made of such income xxx.

Petitioner adds that rented income derived by a tax-exempt organization from the lease of its
properties, real or personal, [is] not, therefore, exempt from income taxation, even if such
income [is] exclusively used for the accomplishment of its objectives. [17] We agree with the
commissioner.

Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of
strict interpretation in construing tax exemptions.[18] Furthermore, a claim of statutory exemption
from taxation should be manifest and unmistakable from the language of the law on which it is
based. Thus, the claimed exemption must expressly be granted in a statute stated in a language
too clear to be mistaken.[19]

In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very
wording of the last paragraph of then Section 27 of the NIRC which mandates that the income of
exempt organizations (such as the YMCA) from any of their properties, real or personal, be
subject to the imposed by the same Code. Because the last paragraph of said section
unequivocally subjects to tax the rent income f the YMCA from its rental property, [20] the Court is
duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted
attempt at construction.

It is axiomatic that where the language of the law is clear and unambiguous, its express
terms must be applied.[21] Parenthetically, a consideration of the question of construction must not
even begin, particularly when such question is on whether to apply a strict construction or a
literal one on statutes that grant tax exemptions to religious, charitable and educational
propert[ies] or institutions.[22]

The last paragraph of Section 27, the YMCA argues, should be subject to the qualification
that the income from the properties must arise from activities conducted for profit before it may
be considered taxable.[23] This argument is erroneous. As previously stated, a reading of said
paragraph ineludibly shows that the income from any property of exempt organizations, as well
as that arising from any activity it conducts for profit, is taxable. The phrase any of their
activities conducted for profit does not qualify the word properties. This makes income from the
property of the organization taxable, regardless of how that income is used -- whether for profit
or for lofty non-profit purposes.

Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible
error when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it
derived from renting out its real property, on the solitary but unconvincing ground that the said
income is not collected for profit but is merely incidental to its operation. The law does not make
a distinction. The rental income is taxable regardless of whence such income is derived and how
it used or disposed of. Where the law does not distinguish, neither should we.

Constitutional Provisions

on Taxation

Invoking not only the NIRC but also the fundamental law, private respondent submits that
Article VI, Section 28 of par. 3 of the 1987 Constitution,[24] exempts charitable institutions from
the payment not only of property taxes but also of income tax from any source. [25] In support of
its novel theory, it compares the use of the words charitable institutions, actually and directly in
the 1973 and the 1987 Constitutions, on the hand; and in Article VI Section 22, par. 3 of the 1935
Constitution, on the other hand.[26]

Private respondent enunciates three points. First, the present provision is divisible into two
categories: (1) [c]haritable institutions, churches and parsonages or convents appurtenant thereto,
mosques and non-profit cemeteries, the incomes of which are, from whatever source, all tax-
exempt;[27] and (2) [a]ll lands, buildings and improvements actually and directly used for
religious, charitable or educational purposes, which are exempt only from property taxes.
[28]
Second, Lladoc v. Commissioner of Internal Revenue,[29] which limited the exemption only to
the payment of property taxes, referred to the provision of the 1935 Constitution and not to its
counterparts in the 1973 and the 1987 Constitutions. [30] Third, the phrase actually, directly and
exclusively used for religious, charitable or educational purposes refers not only to all lands,
buildings and improvements, but also to the above-quoted first category which includes
charitable institutions like the private respondent.[31]

The Court is not persuaded. The debates, interpellations and expressions of opinion of the
framers of the Constitution reveal their intent which, in turn, may have guided the people in
ratifying the Charter.[32] Such intent must be effectuated.

Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is

now a member of this Court, stressed during the Concom debates that xxx what is exempted is
not the institution itself xxx; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or educational
purposes.[33] Father Joaquin G. Bernas, an eminent authority on the Constitution and also a
member of the Concom, adhered to the same view that the exemption created by said provision
pertained only to property taxes.[34]

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that [t]he tax exemption
covers property taxes only."[35] Indeed, the income tax exemption claimed by private respondent
finds no basis in Article VI, Section 28, par. 3 of the Constitution.

Private respondent also invokes Article XIV, Section 4, par. 3 of the Charter, [36] claiming that
the YMCA is a non-stock, non-profit educational institution whose revenues and assets are used
actually, directly and exclusively for educational purposes so it is exempt from taxes on its
properties and income.[37] We reiterate that private respondent is exempt from the payment of
property tax, but not income tax on the rentals from its property. The bare allegation alone that it
is a non-stock, non-profit educational institution is insufficient to justify its exemption from the
payment of income tax.

As previously discussed, laws allowing tax exemption are construed strictissimi

juris. Hence, for the YMCA to be granted the exemption it claims under the aforecited provision,
it must prove with substantial evidence that (1) it falls under the classification non-stock, non-
profit educational institution; and (2) the income it seeks to be exempted from taxation is used
actually, directly, and exclusively for educational purposes. However, the Court notes that not a
scintilla of evidence was submitted by private respondent to prove that it met the said requisites.
 Is the YMCA an educational institution within the purview of Article XIV, Section 4, par.3
of the Constitution? We rule that it is not. The term educational institution or institution of
learning has acquired a well-known technical meaning, of which the members of the
Constitutional Commission are deemed cognizant.[38] Under the Education Act of 1982, such term
refers to schools.[39] The school system is synonymous with formal education, [40] which refers to
the hierarchically structured and chronological graded learnings organized and provided by the
formal school system and for which certification is required in order for the learner to progress
through the grades or move to the higher levels. [41] The Court has examined the Amended Articles
of Incorporation[42] and By-Laws[43] of the YMCA, but found nothing in them that even hints that
it is a school or an educational institution.[44]

Furthermore, under the Education Act of 1982, even non-formal education is understood to
be school-based and private auspices such as foundations and civic-spirited organizations are
ruled out.[45] It is settled that the term educational institution, when used in laws granting tax
exemptions, refers to a xxx school seminary, college or educational establishment xxx.
[46]
Therefore, the private respondent cannot be deemed one of the educational institutions
covered by the constitutional provision under consideration.

xxx Words used in the Constitution are to be taken in their ordinary acceptation. While in its
broadest and best sense education embraces all forms and phrases of instruction, improvement
and development of mind and body, and as well of religious and moral sentiments, yet in the
common understanding and application it means a place where systematic instruction in any or
all of the useful branches of learning is given by methods common to schools and institutions of
learning.That we conceive to be the true intent and scope of the term [educational institutions,]
as used in the Constitution.[47]

Moreover, without conceding that Private Respondent YMCA is an educational institution,

the Court also notes that the former did not submit proof of the proportionate amount of the
subject income that was actually, directly and exclusively used for educational purposes. Article
XIII, Section 5 of the YMCA by-laws, which formed part of the evidence submitted, is patently
insufficient, since the same merely signified that [t]he net income derived from the rentals of the
commercial buildings shall be apportioned to the Federation and Member Associations as the
National Board may decide.[48] In sum, we find no basis for granting the YMCA exemption from
income tax under the constitutional provision invoked

Cases Cited by Private

Respondent Inapplicable

The cases[49] relied on by private respondent do not support its cause. YMCA of Manila v.
Collector of Internal Revenue[50] and Abra Valley College, Inc. v. Aquino[51] are not applicable,
because the controversy in both cases involved exemption from the payment of property tax, not
income tax. Hospital de San Juan de Dios, Inc. v. Pasay City [52] is not in point either, because it
involves a claim for exemption from the payment of regulatory fees, specifically electrical
inspection fees, imposed by an ordinance of Pasay City -- an issue not at all related to that
involved in a claimed exemption from the payment if income taxes imposed on property
leases. In Jesus Sacred Heart College v. Com. Of Internal Revenue,[53] the party therein, which
claimed an exemption from the payment of income tax, was an educational institution which
submitted substantial evidence that the income subject of the controversy had been devoted or
used solely for educational purposes. On the other hand, the private respondent in the present
case had not given any proof that it is an educational institution, or that of its rent income is
actually, directly and exclusively used for educational purposes.

Epilogue

In deliberating on this petition, the Court expresses its sympathy with private respondent. It
appreciates the nobility its cause. However, the Courts power and function are limited merely to
applying the law fairly and objectively. It cannot change the law or bend it to suit its sympathies
and appreciations. Otherwise, it would be overspilling its role and invading the realm of
legislation.

We concede that private respondent deserves the help and the encouragement of the
government. It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the
Court regrets that, given its limited constitutional authority, it cannot rule on the wisdom or
propriety of legislation. That prerogative belongs to the political departments of
government. Indeed, some of the member of the Court may even believe in the wisdom and
prudence of granting more tax exemptions to private respondent. But such belief, however well-
meaning and sincere, cannot bestow upon the Court the power to change or amend the law.

WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated
September 28, 1995 and February 29, 1996 are hereby dated February 16, 1995
is REVERSED and SET ASIDE. The Decision of the Court of Appeals dated February 16, 1995
is REINSTATED, insofar as it ruled that the income tax. No pronouncement as to costs.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-12719 May 31, 1962

THE COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.

Office of the Solicitor General for petitioner.

V. Jaime and L. E. Petilla for respondent.

PAREDES, J.:

This is a petition to review the decision of the Court of Tax Appeals, reversing the decision
of the Collector of Internal Revenue, assessing against and demanding from the "Club
Filipino, Inc. de Cebu", the sum of P12,068.84 as fixed and percentage taxes, surcharge
and compromise penalty, allegedly due from it as a keeper of bar and restaurant.

As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a
civic corporation organized under the laws of the Philippines with an original authorized
capital stock of P22,000.00, which was subsequently increased to P200,000.00, among
others, to it "proporcionar, operar, y mantener un campo de golf, tenis, gimnesio
(gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y toda clase de
juegos no prohibidos por leyes generales y ordenanzas generales; y desarollar y cultivar
deportes de toda clase y denominacion cualquiera para el recreo y entrenamiento
saludable de sus miembros y accionistas" (sec. 2, Escritura de Incorporacion del Club
Filipino, Inc. Exh. A). Neither in the articles or by-laws is there a provision relative to
dividends and their distribution, although it is covenanted that upon its dissolution, the
Club's remaining assets, after paying debts, shall be donated to a charitable Philippine
Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a.).

The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased
from the government), and a bar-restaurant where it sells wines and liquors, soft drinks,
meals and short orders to its members and their guests. The bar-restaurant was a
necessary incident to the operation of the club and its golf-course. The club is operated
mainly with funds derived from membership fees and dues. Whatever profits it had, were
used to defray its overhead expenses and to improve its golf-course. In 1951. as a result of
a capital surplus, arising from the re-valuation of its real properties, the value or price of
which increased, the Club declared stock dividends; but no actual cash dividends were
distributed to the stockholders. In 1952, a BIR agent discovered that the Club has never
paid percentage tax on the gross receipts of its bar and restaurant, although it secured
B-4, B-9(a) and B-7 licenses. In a letter dated December 22, 1852, the Collector of Internal
Revenue assessed against and demanded from the Club, the following sums:

As percentage tax on its gross receipts

during the tax years 1946 to 1951 P9,599.07
Surcharge therein 2,399.77
As fixed tax for the years 1946 to 1952 70.00
Compromise penalty 500.00
The Club wrote the Collector, requesting for the cancellation of the assessment. The
request having been denied, the Club filed the instant petition for review.

The dominant issues involved in this case are twofold:

1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed
and percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax
Code, under which the assessment was made, in connection with the operation of its bar
and restaurant, during the periods mentioned above; and

2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.

Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in
a business on which the percentage tax is imposed shall pay in full a fixed annual tax of ten
pesos for each calendar year or fraction thereof in which such person shall engage in said
business." Section 183 provides in general that "the percentage taxes on business shall be
payable at the end of each calendar quarter in the amount lawfully due on the business
transacted during each quarter; etc." And section 191, same Tax Code, provides
"Percentage tax . . . Keepers of restaurants, refreshment parlors and other eating places
shall pay a tax three per centum, and keepers of bar and cafes where wines or liquors are
served five per centum of their gross receipts . . .". It has been held that the liability for fixed
and percentage taxes, as provided by these sections, does not ipso facto attach by mere
reason of the operation of a bar and restaurant. For the liability to attach, the operator
thereof must be engaged in the business as a barkeeper and restaurateur. The plain and
ordinary meaning of business is restricted to activities or affairs where profit is the purpose
or livelihood is the motive, and the term business when used without qualification, should be
construed in its plain and ordinary meaning, restricted to activities for profit or livelihood
(The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila Elks Club] & Court of
Tax Appeals, G.R. No. L-11176, June 29, 1959, giving full definitions of the word "business";
Coll. of Int. Rev. v. Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No. L-12178, Aug.
21, 1959, the facts of which are similar to the ones at bar; Manila Polo Club v. B. L. Meer,
etc., No. L-10854, Jan. 27, 1960).

Having found as a fact that the Club was organized to develop and cultivate sports of all
class and denomination, for the healthful recreation and entertainment of its stockholders
and members; that upon its dissolution, its remaining assets, after paying debts, shall be
donated to a charitable Philippine Institution in Cebu; that it is operated mainly with funds
derived from membership fees and dues; that the Club's bar and restaurant catered only to
its members and their guests; that there was in fact no cash dividend distribution to its
stockholders and that whatever was derived on retail from its bar and restaurant was used
to defray its overall overhead expenses and to improve its golf-course (cost-plus-expenses-
basis), it stands to reason that the Club is not engaged in the business of an operator of
bar and restaurant (same authorities, cited above).

It is conceded that the Club derived profit from the operation of its bar and restaurant, but
such fact does not necessarily convert it into a profit-making enterprise. The bar and
restaurant are necessary adjuncts of the Club to foster its purposes and the profits
derived therefrom are necessarily incidental to the primary object of developing and
cultivating sports for the healthful recreation and entertainment of the stockholders
and members. That a Club makes some profit, does not make it a profit-making Club. As
has been remarked a club should always strive, whenever possible, to have surplus (Jesus
Sacred Heart College v. Collector of Int. Rev., G.R. No. L-6807, May 24, 1954; Collector of
Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct. 23, 1956). 1wph1.t

It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee
Club is a stock corporation. This is unmeritorious. The facts that the capital stock of the
respondent Club is divided into shares, does not detract from the finding of the trial court
that it is not engaged in the business of operator of bar and restaurant. What is
determinative of whether or not the Club is engaged in such business is its object or
purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose
is not controlled by the corporate form or by the commercial aspect of the business
prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method
of operation. From the extrinsic evidence adduced, the Tax Court concluded that the Club is
not engaged in the business as a barkeeper and restaurateur.

Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a
capital stock divided into shares and (2) an authority to distribute to the holders of such
shares, dividends or allotments of the surplus profits on the basis of the shares held (sec. 3,
Act No. 1459). In the case at bar, nowhere in its articles of incorporation or by-laws could be
found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it
cannot, therefore, be considered a stock corporation, within the contemplation of the
corporation law.

A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-
profit, nonstock organizations, unless the intent to the contrary is manifest and patent"
(Collector v. BPOE Elks Club, et al., supra), which is not the case in the present appeal.

Having arrived at the conclusion that respondent Club is not engaged in the business as an
operator of a bar and restaurant, and therefore, not liable for fixed and percentage taxes, it
follows that it is not liable for any penalty, much less of a compromise penalty.

WHEREFORE, the decision appealed from is affirmed without costs.

Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera and Dizon, JJ.,
concur.
Bengzon, C.J., is on leave.