consti ii cases - taxation

8/13/2019 Consti II Cases - Taxation

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CONSTITUTIONAL LAW II CASES - TAXATION

TABLE OF CONTENTS

COMMISSIONER vs PINEDA .......................................................................... 2COMMISSIONER vs ALGUE ............................................................................ 4LUTZ vs ARANETA............................................................................................. 6SISON vs ANCHETA ........................................................................................... 8BASCO vs PAGCOR ...........................................................................................12PEPSI-COLA vs MUN. OF TANAUAN.........................................................19TAN vs DEL ROSARIO .....................................................................................24PASCUAL vs SECRETARY OF PUBLIC WORKS .....................................28CITY OF BAGUIO vs DE LEON .....................................................................32ABRA VALLEY vs AQUINO ............................................................................35HERRERA vs QC ASSESSMENT BOARD ..................................................38GASTON vs REPUBLIC PLANTERS BANK...............................................41LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY .................43


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COMMISSIONER vs PINEDA

EN BANC

[G.R. No. L-22734. September 15, 1967.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MANUEL B. PINEDA, as one of the heirs of

deceased ATANASIO PINEDA,respondent.

Solicitor General for petitioner.

Manuel B. Pineda for and in his own behalf as respondent.

SYLLABUS

1.TAXATION; INCOME TAX; LIABILITY OF HEIR FOR TAX DUE THE ESTATE. An heir is liable for theassessment against the estate as an heir and as a holder-transferee of property belonging to the

estate/taxpayer. As an heir, he is individually answerable for the part of the tax proportionate to

the share he received from the inheritance (Government of the Philippine Islands vs. Santos, 56

Phil., 827). His liability, however, cannot exceed the amount of his share (Art. 1311, Civil Code). As

a holder of the property belonging to the estate, he is liable for the tax up to the amount of the

property in his possession.

2.ID.; ID.; WAYS OF COLLECTION. The Government has two ways of collecting the taxes in

question. One, by going after all the heirs and collecting from each one of them the amount of the

tax proportionate to the inheritance received. Another remedy, pursuant to the lien created by

Section 315 of the Tax Code upon all property and rights to property belonging to the taxpayer for

unpaid income tax, is by subjecting said property of the estate which is in the hands of an heir or

transferee to the payment of the tax due the estate.

DECISION

BENGZON, J.P., J p:On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children,

the eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of

First Instance of Manila (Case No. 71129) wherein the surviving widow was appointed

administratrix. The estate was divided among and awarded to the heirs and the proceedings

terminated on June 8, 1948. Manuel B. Pineda's share amounted to about P2,500.00.

After the estate proceedings were closed, the Bureau of Internal Revenue investigated the income

tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the

corresponding income tax returns were not filed. Thereupon, the representative of the Collector

of Internal Revenue filed said returns for the estate on the basis of information and data obtained

from the aforesaid estate proceedings and issued an assessment for the following:

1.Deficiency income tax

1945P135.83

1946436.95

19471,206.91P1,779.69

Add:5% surcharge88.98

1% monthly interest

from November 30,

1953 to April 15, 1957720.77

Compromise for late

filing80.00

Compromise for late

payment40.00

________

Total Amount dueP2,707.44.

2.Additional residence tax for

194514.50

=======

3.Real Estate dealer's tax for

the fourth quarter of

1946 and the whole year

of 1947207.50

======

Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed

to the Court of Tax Appeals alleging that he was appealing "only that proportionate part or portion

pertaining to him as one of the heirs."

After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of

the Commissioner on the ground that his right to assess and collect the tax has prescribed. The

Commissioner appealed and this Court affirmed the findings of the Tax Court in respect to theassessment for income tax for the year 1947 but held that the right to assess and collect the taxes

for 1945 and 1946 has not prescribed. For 1945 and 1946 the returns were filed on August 24,

1953; assessments both taxable years were made within five years therefrom or on October 19,

1953; and the action to collect the tax was filed within five years from the latter date, on August 7,

1957. For taxable year 1947, however, the return was filed on March 1, 1948; the assessment was

made on October 19, 1953, more than five years from the date the return was filed; hence, the

right to assess income tax for 1947 had prescribed. Accordingly, We remanded the case to the Tax

Court for further appropriate proceedings. 1

In the Tax Court, the parties submitted the case for decision without additional evidence.

On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda

liable for the payment corresponding to his share of the following taxes:

Deficiency income tax

1945P135.83

1946436.95

Real estate dealer's fixed tax 4th

quarter of 1946 and whole year

of 1947P187.50

The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B.

Pined liable for the payment of all the taxes found by the Tax Court to be due from the estate in

the total amount of P760.28 instead of only for the amount of taxes corresponding to his share in

the estate.

Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid

income tax due the estate only up to the extent of and in proportion to any share he received. He

relies on Government of the Philippine Islands vs. Pamintuan 2 where We held that "after the

partition of an estate, heirs and distributees are liable individually for the payment of all lawful

outstanding claims against the estate in proportion to the amount or value of the property they

have respectively received from the estate."

We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes

assessed.Pineda is liable for the assessment as an heir and as a holder- transferee of property belonging to

the estate/taxpayer. As an heir he is individually answerable for the part of the tax proportionate

to the share he received from the inheritance. 3 His liability however cannot exceed the amount

of his share. 4

As a holder of property belonging to the estate, Pineda is liable for the tax up to the amount of the

property in his possession. The reason is that the Government has a lien on the P2,500.00

received by him from the estate as his share in the inheritance, for unpaid income taxes 4 for

which said estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code, which

we quote hereunder:

"If any person, corporation, partnership, joint-account (cuenta en participacion), association, or

insurance company liable to pay the income tax, neglects or refuses to pay the same after

demand, the amount shall be a lien in favor of the Government of the Philippines from the time

when the assessment was made by the Commissioner of Internal Revenue until paid with interest,


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penalties, and costs that may accrue in addition thereto upon all property and rights to property

belonging to the taxpayer: . . ."

By virtue of such lien, the Government has the right to subject the property in Pineda's

possession, i.e., the P2,500.00, to satisfy the income tax assessment in the sum of P760.28. After

such payment, Pineda will have a right of contribution from his co-heirs, 5 to achieve an

adjustment of the proper share of each heir in the distributable estate.

All told, the Government has two days of collecting the taxes in question. One, by going after all

the heirs and collecting from each one of them the amount of the tax proportionate to the

inheritance received. This remedy was adopted in Government of the Philippine Islands vs.

Pamintuan, supra. In said case, the Government filed an action against all the heirs for thecollection of the tax. This action rests on the concept that hereditary property consists only of that

part which remains after the settlement of all lawful claims against the estate, for the settlement

of which the entire estate is first liable. 6 The reason why in case suit is filed against all the heirs

the tax due from the estate is levied proportionately against them is to achieve thereby two

results: first, payment of the tax; and second, adjustment of the shares of each heir in the

distributed estate as lessened by the tax.

Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property

and rights to property belonging to the taxpayer for unpaid income tax is by subjecting said

property of the estate which is in the hands of an heir or transferee to the payment of the tax due

the estate. This second remedy is the very avenue the Government took in this case to collect the

tax. The Bureau of Internal Revenue should be given, in instances like the case at bar, the

necessary discreation to avail itself of the most expeditious way to collect the tax as may be

envisioned in the particular provision of the Tax Code above quoted, because taxes are the

lifeblood of Government and their prompt and certain availability is an imperious need. 7 And as

afore-stated, in this case the suit seeks to achieve only one objective: payment of the tax. The

adjustment of the respective shares due to the heir from the inheritance, as lessened by the tax, is

left to await the suit for contribution by the heir from whom the Government recovered said tax.

WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to pay

to the Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for 1945

and 1946, and real estate dealer's fixed tax for the fourth quarter to his right of contribution from

his co-heirs. No costs. So ordered.

Concepcion, C . J . , Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Ruiz Castro, Angeles and

Fernando, JJ., concur.

Footnotes

1.Collector of Internal Revenue vs. Manuel B. Pineda as one of the heirs of the deceased Antonio

Pineda, L-14522, May 31, 1961.

2.55 Phi. 13.

3.Government of the Philippine Islands vs. Santos, 56 Phi., 827.

4.Art., 1311, Civil Code of the Philippines.4a.Real estate dealer's fixed tax is subject to the same lien pursuant to the first paragraph of Sec.

315, Tax Code.

5.Government of the Philippine Islands vs. Santos, G.R. No. L- 34152, Dec. 15, 1931, 56 Phil. 827.

6.Lopez vs. Enriquez, 16 Phil. 336.

7.Bull vs. United States, 295 U.S. 247, 15 AFTR 1069, 1073.


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COMMISSIONER vs ALGUE

FIRST DIVISION

[G.R. No. L-28896. February 17, 1988.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ALGUE, INC., and THE COURT OF TAX

APPEALS, respondents.

SYLLABUS

1.TAXATION; NATIONAL INTERNAL REVENUE CODE; DEFICIENCY INCOME TAXES; PERIOD TO

APPEAL ASSESSMENT, SUSPENDED BY FILING OF PROTEST. According to Rep. Act No. 1125, the

appeal may be made within thirty days after receipt of the decision or ruling challenged. It is truethat as a rule the warrant of distraint and levy is "proof of the finality of the assessment" and

"renders hopeless a request for reconsideration," being "tantamount to an outright denial thereof

and makes the said request deemed rejected." But there is a special circumstance in the case at

bar that prevents application of this accepted doctrine. The proven fact is that four days after the

private respondent received the petitioner's notice of assessment, it filed its letter of protest. This

was apparently not taken into account before the warrant of distraint and levy was issued; indeed,

such protest could not be located in the office of the petitioner. It was only after Atty. Guevara

gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During

the intervening period, the warrant was premature and could therefore not be served. As the

Court of Tax Appeals correctly noted, the protest filed by private respondent was not pro forma

and was based on strong legal considerations. It thus had the effect of suspending on January 18,

1965, when it was filed, the reglementary period which started on the date the assessment was

received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the

private respondent was definitely informed of the implied rejection of the said protest and thewarrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days

of the reglementary period had been consumed.

2.ID.; ID.; INCOME TAX; DEDUCTION FROM GROSS INCOME; P75,000.00 PROMOTIONAL FEES;

FOUND NECESSARY AND REASONABLE IN CASE AT BAR. We agree with the respondent court

that the amount of the promotional fees was not excessive. The total commission paid by the

Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. After

deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the

transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable

proportion, considering that it was the payees who did practically everything, from the formation

of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate

properties. In the present case, however, we find that the onus has been discharged satisfactorily.

The private respondent has proved that the payment of the fees was necessary and reasonable in

the light of the efforts exerted by the payees in inducing investors and prominent businessmen to

venture in an experimental enterprise and involve themselves in a new business requiring millions

of pesos.

D E C I S I O N

CRUZ, J p:

Taxes are the lifeblood of the government and so should be collected without unnecessary

hindrance. On the other hand, such collection should be made in accordance with law as any

arbitrariness will negate the very reason for government itself. It is therefore necessary to

reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real

purpose of taxation, which is the promotion of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed

the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in

its income tax returns. The corollary issue is whether or not the appeal of the private respondent

from the decision of the Collector of Internal Revenue was made on time and in accordance with

law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation

engaged in engineering, construction and other allied activities, received a letter from the

petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the years

1958 and 1959. 1 On January 18, 1965, Algue filed a letter of protest or request for

reconsideration, which letter was stamp-received on the same day in the office of the petitioner. 2

On March 12, 1965, a warrant of distraint and levy was presented to the private respondent,

through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the

pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty.

Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred

service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was nottaking any action on the protest and it was only then that he accepted the warrant of distraint and

levy earlier sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a petition for

review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No.

1125, the appeal may be made within thirty days after receipt of the decision or ruling challenged.

7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of the

assessment" 9 being "tantamount to an outright denial thereof and makes the said request

deemed rejected." 10 But there is a special circumstance in the case at bar that prevents

application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of

assessment, it filed its letter of protest. This was apparently not taken into account before the

warrant of distraint and levy was issued; indeed, such protest could not be located in the office of

the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at

all, considered by the tax authorities. During the intervening period, the warrant was premature

and could therefore not be served.

As the Court of Tax Appeals correctly noted, 11 the protest filed by private respondent was not

pro forma and was based on strong legal considerations. It thus had the effect of suspending on

January 18, 1965, when it was filed, the reglementary period which started on the date the

assessment was received, viz., January 14, 1965. The period started running again only on April 7,

1965, when the private respondent was definitely informed of the implied rejection of the said

protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23,

1965, only 20 days of the reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed

because it was not an ordinary, reasonable or necessary business expense. The Court of Tax

Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been

legitimately paid by the private respondent for actual services rendered. The payment was in the

form of promotional fees. These were collected by the payees for their work in the creation of the

Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of theproperties of the Philippine Sugar Estate Development Company.

Parenthetically, it may be observed that the petitioner had originally claimed these promotional

fees to be personal holding company income 12 but later conformed to the decision of the

respondent court rejecting this assertion. 13 In fact, as the said court found, the amount was

earned through the joint efforts of the persons among whom it was distributed. It has been

established that the Philippine Sugar Estate Development Company had earlier appointed Algue as

its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such

authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith O'Farell, and Pablo

Sanchez worked for the formation of the Vegetable Oil Investment Corporation, inducing other

persons to invest in it. 14 Ultimately, after its incorporation largely through the promotion of the

said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue

received as agent a commission of P125,000.00, and it was from this commission that the

P75,000.00 promotional fees were paid to the aforenamed individuals. 16


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There is no dispute that the payees duly reported their respective shares of the fees in their

income tax returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also

found, after examining the evidence, that no distribution of dividends was involved. 18

The petitioner claims that these payments are fictitious because most of the payees are members

of the same family in control of Algue. It is argued that no indication was made as to how such

payments were made, whether by check or in cash, and there is not enough substantiation of such

payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate

assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President,

Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were notmade in one lump sum but periodically and in different amounts as each payee's need arose. 19 It

should be remembered that this was a family corporation where strict business procedures were

not applied and immediate issuance of receipts was not required. Even so, at the end of the year,

when the books were to be closed, each payee made an accounting of all of the fees received by

him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal.

This arrangement was understandable, however, in view of the close relationship among the

persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive.

The total commission paid by the Philippine Sugar Estate Development Co. to the private

respondent was P125,000.00. 21 After deducting the said fees, Algue still had a balance of

P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total

commission. This was a reasonable proportion, considering that it was the payees who did

practically everything, from the formation of the Vegetable Oil Investment Corporation to the

actual purchase by it of the Sugar Estate properties.

This finding of the respondent court is in accord with the following provision of the Tax Code:

"SEC. 30.Deductions from gross income. In computing net income there shall be allowed as

deduction

(a)Expenses:

(1)In general. All the ordinary and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business, including a reasonable allowance for salaries or other

compensation for personal services actually rendered; . . ." 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

"SEC. 70.Compensation for personal services. Among the ordinary and necessary expenses paid

or incurred in carrying on any trade or business may be included a reasonable allowance for

salaries or other compensation for personal services actually rendered. The test of deductibility in

the case of compensation payments is whether they are reasonable and are, in fact, payments

purely for service. This test and its practical application may be further stated and illustrated as

follows:"Any amount paid in the form of compensation, but not in fact as the purchase price of services, is

not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend

on stock. This is likely to occur in the case of a corporation having few stockholders, practically all

of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for

similar services, and the excessive payment correspond or bear a close relationship to the

stockholdings of the officers of employees, it would seem likely that the salaries are not paid

wholly for services rendered, but the excessive payments are a distribution of earnings upon the

stock. . . ." (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor

were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the

validity of the claimed deduction. In the present case, however, we find that the onus has been

discharged satisfactorily. The private respondent has proved that the payment of the fees was

necessary and reasonable in the light of the efforts exerted by the payees in inducing investors

and prominent businessmen to venture in an experimental enterprise and involve themselves in a

new business requiring millions of pesos. This was no mean feat and should be, as it was,

sufficiently recompensed.

It is said that taxes are what we pay for civilized society. Without taxes, the government would be

paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural

reluctance to surrender part of one's hard-earned income to the taxing authorities, every person

who is able to must contribute his share in the running of the government. The government for its

part, is expected to respond in the form of tangible and intangible benefits intended to improve

the lives of the people and enhance their moral and material values. This symbiotic relationship is

the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method ofexaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all

democratic regimes that it be exercised reasonably and in accordance with the prescribed

procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to

his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if

the taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on

time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the

claimed deduction by the private respondent was permitted under the Internal Revenue Code and

should therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without

costs.

SO ORDERED.

Teehankee, C.J., Narvasa, Gancayco and Grio-Aquino, JJ., concur.

Footnotes

1.Rollo, pp. 28-29.

2.Ibid., pp. 29; 42.

3.Id., p. 29.

4.Respondent's Brief, p. 11.

5.Id., p. 29.

6.Id.

7.Sec. 11.

8.Phil. Planters Investment Co. Inc. v. Acting Comm. of Internal Revenue, CTA Case No. 1266, Nov.

11, 1962; Rollo, p. 30.

9.Vicente Hilado v. Comm. of Internal Revenue, CTA Case No. 1256, Oct. 22, 1962; Rollo, p. 30.

10.Ibid.

11.Penned by Associate Judge Estanislao R. Alvarez, concurred by Presiding Judge Ramon M.

Umali and Associate Judge Ramon L. Avancea.

12.Rollo, p. 33.13.Ibid., pp. 7-8; Petition, pp. 2-3.

14.Id., p. 37.

15.Id.

16.Id.

17Id.

18.Id.

19.Respondent's Brief, pp. 25-32.

20.Ibid., pp. 30-32.

21.Rollo, p. 37.

22.Now Sec. 30, (a) (1) (A), National Internal Revenue Code.

23.Respondent's Brief, p. 35.


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LUTZ vs ARANETA

FIRST DIVISION

[G.R. No. L-7859. December 22, 1955.]

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio Jayme

Ledesma, plaintiff-appellant, vs. J. ANTONIO ARANETA, as the Collector of Internal Revenue,

defendant-appellee.

Ernesto J. Gonzaga for appellant.

Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and

Solicitor Felicisimo R. Rosete for appellee.SYLLABUS

1.CONSTITUTIONAL LAW; TAXATION; POWER OF STATE TO LEVY TAX IN AND SUPPORT OF SUGAR

INDUSTRY. As the protection and promotion of the sugar industry is a matter of public concern

the Legislature may determine within reasonable bounds what is necessary for its protection and

expedient for its promotion. Here, the legislative must be allowed full play, subject only to the test

of reasonableness; and it is not contended that the means provided in section 6 of

Commonwealth Act No. 567 bear no relation to the objective pursued or are oppressive in

character. If objective an methods are alike constitutionally valid, no reason is seen why the state

may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the

implement. Taxation may be made the implement of the state's police power (Great Atl. & Pac.

Tea Co. vs. Grosjean, 301 U.S. 412, 81 L. Ed. 1193; U.S. vs. Butler, 297 U.S. 1, 80 L. Ed. 477;

M'Culloch vs. Maryland, 4 Wheat, 316, 4 L. Ed. 579).

2.ID.; ID.; POWER OF STATE TO SELECT SUBJECT OF TAXATION. It is inherent in the power to tax

that a state be free to select the subjects of taxation, and it has been repeatedly held that

"inequalities which result from a singling out of one particular class for taxation or exemption

infringe no constitutional limitation (Carmicheal vs. Southern Coal & Coke Co., 301 U.S. 495, 81 L.

Ed. 1245, citing numerous authorities, at 1251).

D E C I S I O N

REYES, J. B. L., J p:

This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the

taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.

Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due

to the threat to our industry by the imminent imposition of export taxes upon sugar as provided in

the Tydings-McDuffie Act, and the "eventual loss of its preferential position in the United States

market"; wherefore, the national policy was expressed "to obtain a readjustment of the benefits

derived from the sugar industry by the component elements thereof" and "to stabilize the sugar

industry so as to prepare it for the eventuality of the loss of its preferential position in the United

States market and the imposition of the export taxes."

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the

manufacture of sugar, on a graduated basis, on each picul of sugar manufactures; while section 3

levies on owners or persons in control of lands devoted to the cultivation of sugar cane and ceded

to others for a consideration, on lease or otherwise

"a tax equivalent to the difference between the money value of the rental or consideration

collected and the amount representing 12 per centum of the assessed value of such land."

According to section 6 of the law

SEC. 6.All collections made under this Act shall accrue to a special fund in the Philippine Treasury,

to be known as the 'Sugar Adjustment and Stabilization Fund,' and shall be paid out only for any or

all of the following purposes or to attain any or all of the following objectives, as may be provided

by law.

First, to place the sugar industry in a position to maintain itself despite the gradual loss of the

preferential position of the Philippine sugar in the United States market, and ultimately to insure

its continued existence notwithstanding the loss of that market and the consequent necessity of

meeting competition in the free markets of the world;

Second, to readjust the benefits derived from the sugar industry by all of the component elements

thereof the mill, the landowner, the planter of the sugar cane, and the laborers in the factory

and in the field so that all might continue profitably to engage therein;

Third, to limit the production of sugar to areas more economically suited to the production

thereof; and

Fourth, to afford labor employed in the industry a living wage and to improve their living and

working conditions: Provided, That the President of the Philippines may, until the adjournment of

the next regular session of the National Assembly, make the necessary disbursements from the

fund herein created (1) for the establishment and operation of sugar experiment station or

stations and the undertaking of researchers (a)to increase the recoveries of the centrifugal sugar

factories with the view of reducing manufacturing costs, (b) to produce and propagate higher

yielding varieties of sugar cane more adaptable to different distinct conditions in the Philippines,

(c) to lower the costs of raising sugar cane, (d) to improve the buying quality of denatured alcohol

from molasses for motor fuel, (e) to determine the possibility of utilizing the other by-products of

the industry, (f) to determine what crop or crops are suitable for rotation and for the utilization of

excess cane lands, and (g) on other problems the solution of which would help rehabilitated and

stabilize the industry, and (2) for the improvement of living and working conditions in sugar mills

and sugar plantations, authorizing him to organize the necessary agency or agencies to take

charge of the expenditure and allocation of said funds to carry out the purpose hereinbefore

enumerated, and, likewise, authorizing the disbursement from the fund herein created of the

necessary amount of amounts needed for salaries, wages, travelling expenses, equipment, and

other sundry expenses or said agency or agencies."

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio

Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40

paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-

1950; alleging that such tax is unconstitutional and void, being levied for the aid and support of

the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax

may be constitutionally levied. The action having been dismissed by the Court of First Instance,

the plaintiffs appealed the case directly to this Court (Judiciary Act, section 17).

The basic defect in the plaintiff's position is his assumption that the tax provided for in

Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and

particularly of section 6 (heretofore quoted in full), will show that the tax is levied with a

regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened

sugar industry. In other words, the act is primarily an exercise of the police power.

This Court can take judicial notice of the fact that sugar production in one of the great industries

of our nation, sugar occupying a leading position among its export products; that it gives

employment to thousands of laborers in fields and factories; that it is a great source of the state'swealth, is one of the important sources of foreign exchange needed by our government, and is

thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion,

protection and advancement, therefore redounds greatly to the general welfare. Hence it was

competent for the legislature to find that the general welfare demanded that the sugar industry

should be stabilized in turn; and in the wide field of its police power, the law-making body could

provide that the distribution of benefits therefrom be readjusted among its components to enable

it to resist the added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237

U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So 853; Maxcy Inc. vs.

Mayo, 103 Fla. 552, 139 So. 121).

As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida

"The protection of a large industry constituting one of the great sources of the state's wealth and

therefore directly or indirectly affecting the welfare of so great a portion of the population of the

State is affected to such an extent by public interests as to be within the police power of the

sovereign." (128 So. 857)


7/47

7

Once it is conceded, as it must, that the protection and promotion of the sugar industry is a

matter of public concern, it follows that the Legislature may determine within reasonable bounds

what is necessary for its protection and expedient for its promotion. Here, the legislative

discretion must be allowed full play, subject only to the test of reasonableness; and it is not

contended that the means provided in section 6 of the law (above quoted) bear no relation to the

objective pursued or are oppressive in character. If objective and methods are alike

constitutionally valid, no reason is seen why the state may not be levy taxes to raise funds for their

prosecution and attainment. Taxation may be made the implement of the state's police power

(Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80

L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 318, 4 L. Ed. 579).

That the tax to be levied should burden the sugar producers themselves can hardly be a ground of

complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be

benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the

power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held

that "inequalities which result from a singling out of one particular class for taxation, or exemption

infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L.

Ed. 1245, citing numerous authorities, at p. 1251).

From the point of view we have taken it appears of no moment that the funds raised under the

Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry,

since it is that very enterprise that is being protected. It may be that other industries are also in

need of similar protection; but the legislature is not required by the Constitution to adhere to a

policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L.

Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be overthrown

because there are other instances to which it might have been applied;" and that the legislative

authority, exerted within its proper field, need not embrace all the evils within its reach" (N. L. R.

B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).

Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of

tax money to experimental stations to seek increase of efficiency in sugar production, utilization of

by- products and solution of allied problems, as well as to the improvement of living and working

conditions in sugar mills or plantations, without any part of such money being channeled directly

to private persons, constitutes expenditure of tax money for private purposes, (compare Everson

vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).

The decision appealed from is affirmed, with costs against appellant. So ordered.

Paras, C. J., Bengzon, Padilla, Reyes, A., Jugo, Bautista Angelo, Labrador and Concepcion, JJ.,

concur.


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8

SISON vs ANCHETA

EN BANC

G.R. No. L-59431 July 25, 1984

ANTERO M. SISON, JR., petitioner,

vs.

RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy

Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau ofInternal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman,

Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance, respondents.

Antero Sison for petitioner and for his own behalf.

The Solicitor General for respondents.

FERNANDO, C.J.:

The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on

the validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional

infirmity. The assailed provision further amends Section 21 of the National Internal Revenue Code

of 1977, which provides for rates of tax on citizens or residents on (a) taxable compensation

income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank

deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and

similar arrangements, (e) dividends and share of individual partner in the net profits of taxable

partnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof,

"he would be unduly discriminated against by the imposition of higher rates of tax upon his

income arising from the exercise of his profession vis-a-vis those which are imposed upon fixed

income or salaried individual taxpayers. 4 He characterizes the above sction as arbitrary

amounting to class legislation, oppressive and capricious in character 5 For petitioner, therefore,

there is a transgression of both the equal protection and due process clauses 6 of the Constitution

as well as of the rule requiring uniformity in taxation. 7

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10

days from notice. Such an answer, after two extensions were granted the Office of the Solicitor

General, was filed on May 28, 1982. 8 The facts as alleged were admitted but not the allegations

which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner,

the truth [for them] being those stated [in their] Special and Affirmative Defenses." 9 The answer

then affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The

authorities and cases cited while correctly quoted or paraghraph do not support petitioner's

stand." 10 The prayer is for the dismissal of the petition for lack of merit.

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

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

reason was so clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to

be left to private enterprise and initiative and which the government was called upon to enter

optionally, and only 'because it was better equipped to administer for the public welfare than is

any private individual or group of individuals,' continue to lose their well-defined boundaries and

to be absorbed within activities that the government must undertake in its sovereign capacity if it

is to meet the increasing social challenges of the times." 11 Hence the need for more revenues.

The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital

state functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes

being the lifeblood of the government, their prompt and certain availability is of the essence. 12

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of

sovereignty. It is the strongest of all the powers of of government." 13 It is, of course, to be

admitted that for all its plenitude 'the power to tax is not unconfined. There are restrictions. The

Constitution sets forth such limits . Adversely affecting as it does properly rights, both the due

process and equal protection clauses inay properly be invoked, all petitioner does, to invalidate in

appropriate cases a revenue measure. if it were otherwise, there would -be truth to the 1803

dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." 14 In a

separate opinion in Graves v. New York, 15 Justice Frankfurter, after referring to it as an 1,

unfortunate remark characterized it as "a flourish of rhetoric [attributable to] the intellectual

fashion of the times following] a free use of absolutes." 16 This is merely to emphasize that it is

riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully

conclude: "The web of unreality spun from Marshall's famous dictum was brushed away by one

stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy while this Court

sits." 17 So it is in the Philippines.

3. This Court then is left with no choice. The Constitution as the fundamental law

overrides any legislative or executive, act that runs counter to it. In any case therefore where it

can be demonstrated that the challenged statutory provision as petitioner here alleges fails

to abide by its command, then this Court must so declare and adjudge it null. The injury thus is

centered on the question of whether the imposition of a higher tax rate on taxable net income

derived from business or profession than on compensation is constitutionally infirm.

4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere

allegation, as here. does not suffice. There must be a factual foundation of such unconstitutional

taint. Considering that petitioner here would condemn such a provision as void or its face, he has

not made out a case. This is merely to adhere to the authoritative doctrine that were the due

process and equal protection clauses are invoked, considering that they arc not fixed rules but

rather broad standards, there is a need for of such persuasive character as would lead to such a

conclusion. Absent such a showing, the presumption of validity must prevail. 18

5. It is undoubted that the due process clause may be invoked where a taxing statute is so

arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown

to amount to the confiscation of property. That would be a clear abuse of power. It then becomesthe duty of this Court to say that such an arbitrary act amounted to the exercise of an authority

not conferred. That properly calls for the application of the Holmes dictum. It has also been held

that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public

purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on

due process grounds. 19

6. Now for equal protection. The applicable standard to avoid the charge that there is a

denial of this constitutional mandate whether the assailed act is in the exercise of the lice power

or the power of eminent domain is to demonstrated that the governmental act assailed, far from

being inspired by the attainment of the common weal was prompted by the spirit of hostility, or at

the very least, discrimination that finds no support in reason. It suffices then that the laws operate

equally and uniformly on all persons under similar circumstances or that all persons must be

treated in the same manner, the conditions not being different, both in the privileges conferred

and the liabilities imposed. Favoritism and undue preference cannot be allowed. For the principle


9/47

9

is that equal protection and security shall be given to every person under circumtances which if

not Identical are analogous. If law be looked upon in terms of burden or charges, those that fall

within a class should be treated in the same fashion, whatever restrictions cast on some in the

group equally binding on the rest." 20 That same formulation applies as well to taxation measures.

The equal protection clause is, of course, inspired by the noble concept of approximating the Ideal

of the laws benefits being available to all and the affairs of men being governed by that serene

and impartial uniformity, which is of the very essence of the Idea of law. There is, however,

wisdom, as well as realism in these words of Justice Frankfurter: "The equality at which the 'equal

protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the

equal protection of the laws,' and laws are not abstract propositions. They do not relate to

abstract units A, B and C, but are expressions of policy arising out of specific difficulties, address to

the attainment of specific ends by the use of specific remedies. The Constitution does not require

things which are different in fact or opinion to be treated in law as though they were the same."

21 Hence the constant reiteration of the view that classification if rational in character is

allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice

J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in the power to tax that a state be

free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which

result from a singling out of one particular class for taxation, or exemption infringe no

constitutional limitation.'" 23

7. Petitioner likewise invoked the kindred concept of uniformity. According to the

Constitution: "The rule of taxation shag be uniform and equitable." 24 This requirement is met

according to Justice Laurel in Philippine Trust Company v. Yatco, 25 decided in 1940, when the tax

"operates with the same force and effect in every place where the subject may be found. " 26 He

likewise added: "The rule of uniformity does not call for perfect uniformity or perfect equality,because this is hardly attainable." 27 The problem of classification did not present itself in that

case. It did not arise until nine years later, when the Supreme Court held: "Equality and uniformity

in taxation means that all taxable articles or kinds of property of the same class shall be taxed at

the same rate. The taxing power has the authority to make reasonable and natural classifications

for purposes of taxation, ... . 28 As clarified by Justice Tuason, where "the differentiation"

complained of "conforms to the practical dictates of justice and equity" it "is not discriminatory

within the meaning of this clause and is therefore uniform." 29 There is quite a similarity then to

the standard of equal protection for all that is required is that the tax "applies equally to all

persons, firms and corporations placed in similar situation." 30

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

consideration the distinction between a tax rate and a tax base. There is no legal objection to a

broader tax base or taxable income by eliminating all deductible items and at the same time

reducing the applicable tax rate. Taxpayers may be classified into different categories. To repeat,it. is enough that the classification must rest upon substantial distinctions that make real

differences. In the case of the gross income taxation embodied in Batas Pambansa Blg. 135, the,

discernible basis of classification is the susceptibility of the income to the application of

generalized rules removing all deductible items for all taxpayers within the class and fixing a set of

reduced tax rates to be applied to all of them. Taxpayers who are recipients of compensation

income are set apart as a class. As there is practically no overhead expense, these taxpayers are e

not entitled to make deductions for income tax purposes because they are in the same situation

more or less. On the other hand, in the case of professionals in the practice of their calling and

businessmen, there is no uniformity in the costs or expenses necessary to produce their income. It

would not be just then to disregard the disparities by giving all of them zero deduction and

indiscriminately impose on all alike the same tax rates on the basis of gross income. There is

ample justification then for the Batasang Pambansa to adopt the gross system of income taxation

to compensation income, while continuing the system of net income taxation as regards

professional and business income.

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

the (1) lack of factual foundation to show the arbitrary character of the assailed provision; 31 (2)

the force of controlling doctrines on due process, equal protection, and uniformity in taxation and

(3) the reasonableness of the distinction between compensation and taxable net income of

professionals and businessman certainly not a suspect classification,

WHEREFORE, the petition is dismissed. Costs against petitioner.

Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr., De la Fuente

and Cuevas, JJ., concur.

Teehankee, J., concurs in the result.

Plana, J., took no part.

Separate Opinions

AQUINO, J., concurring:

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

ABAD SANTOS, J., dissenting:

This is a frivolous suit. While the tax rates for compensation income are lower than those for net

income such circumtance does not necessarily result in lower tax payments for these receiving

compensation income. In fact, the reverse will most likely be the case; those who file returns on

the basis of net income will pay less taxes because they claim all sort of deduction justified or not I

vote for dismissal.

Separate Opinions

AQUINO, J., concurring:

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

ABAD SANTOS, J., dissenting:

This is a frivolous suit. While the tax rates for compensation income are lower than those for net

income such circumtance does not necessarily result in lower tax payments for these receiving

compensation income. In fact, the reverse will most likely be the case; those who file returns on

the basis of net income will pay less taxes because they claim all sort of deduction justified or not I

vote for dismissal.


10/47

10

Footnotes

1 Petitioner must have realized that a suit for declaratory relief must be filed with Regional Trial

Courts.

2 Batas Pambansa Blg. 135, Section 21 (1981).

3 The respondents are Ruben B. Ancheta, Acting Commissioner, Bureau of Internal Revenue;

Romulo Villa, Deputy Commissioner, Bureau of Internal Revenue; Tomas Toledo, Deputy

Commissioner, Bureau of Internal Revenue; Manuel Alba, Minister of Budget; Francisco Tantuico,

Chairman, Commissioner on Audit; and Cesar E. A. Virata, Minister of Finance.

4 Petition, Parties, par. 1. The challenge is thus aimed at paragraphs (a) and (b) of Section 1

further Amending Section 21 of the National Internal Revenue Code of 1977. Par. (a) reads: "(a)

On taxable compensation income. A tax is hereby imposed upon the taxable compensation

income as determined in Section 28 (a) received during each taxable year from all sources by

every individual, whether a citizen of the Philippines, determined in accordance with the following

schedule:

Not over P2,500

0%

Over P 2,500 but not over P 5,000

1%

Over P 5,000 but not over 10,000

P 25 + 3% of excess over P 5,000


P 175 + 7 % of excess over P 10,000


P 875 + 11%, of excess over P 20,000

Over P 40.000 but not over P 60,000

P 3,075 + I 15% of excess over P 40,000

Over P 60,000 but not over P100,000

P 6,075 + 19% of excess over P 60,000

Over P100,000 but not over P250,000

P 13,675 + 24% excess over P100,000


P 49,675 + 29% of excess over P250,000

Over P500,000

P 122,175 + 35% of excess over P500,000

Par. (b) reads: "(b) On taxable net income. A tax is hereby imposed upon the taxable net

income as determined in Section 29 (a) received during each taxable year from all sources by

every individual, whether a citizen of the Philippines, or an alien residing in the Philippines

determined in accordance with the following schedule:

Not over P10,000

5%


P 500 + 15% of excess over P 10,000

Over P 30,000 but not over P150,000

P 3,500 + 30% of excess over P 30,000


P 39,500 + 45% of excess over P150,000

Over P500,000

P197,000 + 601% of excess over P500,000

5 Ibid Statement, par. 4.

6 Article IV, Section 1 of the Constitution reads: "No person shall be deprived of life,

liberty or property without due process of law, nor shall any person be denied the equal

protection of the laws."

7 Article VII, Section 7. par. (1) of the Constitution reads: "The rule of taxation shall beuniform and equitable. The Batasang Pambansa shall evolve a progressive system of taxation."

8 It was filed by Solicitor General Estelito P. Mendoza. He was assisted by Assistant Solicitor

General Eduardo D. Montenegro and Solicitor Erlinda B, Masakayan.

9 Answer, pars. 1-6.

10 Ibid, par. 6.

11 Agricultural Credit and Cooperative Financing Administration v. Consideration of Unions in

Government Corporation and Offices, L-21484, November 29, 1969, 30 SCRA 649, 662.

12 Cf, Vera v. Fernandez, L-31364, March 30, 1979, 89 SCRA 199, per Castro, J.


11/47

11

13 Sarasola v. Trinidad, 40 Phil. 252, 262 (1919).

14 McColloch v. Maryland 4 Wheaton 316,

15 306 US 466 ( 938).

16 Ibid, 489

17 Ibid. 490.

18 Cf. Ermita-Malate Hotel and Motel Operator S Association v. Hon. City Mayor, 127 Phil. 306,

315 ( 1967); U.S. v. Salaveria, 39 Phil. 102,111 (1918) and Ebona v. Daet, 85 Phil, 369 (1950).

Likewise referred to is O'Gorman and Young v. Hartford Fire Insurance Co 282 US 251, 328 (1931).

19 Cf. Manila Gas Co. v. Collector of Internal Revenue, 62 Phil. 895 (1936); Wells Fargo Bank and

Union Trust Co. v. Collector, 70 Phil. 325 (1940); Republic v. Oasan Vda. de Fernandez, 99 Phil. 934

(1956).

20 The excerpt is from the opinion in J.M. Tuason and Co. v. The Land Tenure Administration, L-

21064, February 18, 1970, 31 SCRA 413, 435 and reiterated in Bautista v. Juinio, G.R. No. 50908,

January 31, 1984, 127 SCRA 329, 339. The former deals with an eminent domain proceeding and

the latter with a suit contesting the validity of a police power measure.

21 Tigner v. Texas, 310 US 141, 147 (1940).

22 98 Phil. 148 (1955).

23 Ibid, 153.

24 Article VIII, Section 17, par. 1, first sentence of the Constitution

25 69 Phil. 420 (1940).

26 Ibid, 426.

27 Ibid, 424.

28 Eastern Theatrical Co. v. Alfonso, 83 Phil. 852, 862 (1949).

29 Manila Race Horse Trainers Asso. v. De la Fuente, 88 Phil. 60,65 (1951).

30 Uy Matias v. City of Cebu, 93 Phil. 300 (1953).

31 While petitioner cited figures to sustain in his assertion, public respondents refuted

with other figures that argue against his submission. One reason for requiring declaratory relief

proceedings to start in regional trial courts is precisely to enable petitioner to prove his allegation,

absent an admission in the answer.


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12

BASCO vs PAGCOR

EN BANC

[G.R. No. 91649. May 14, 1991.]

ATTORNEYS HUMBERTO BASCO, EDILBERTO BALCE, SOCRATES MARANAN AND LORENZO

SANCHEZ, petitioners, vs. PHILIPPINE AMUSEMENTS AND GAMING CORPORATION (PAGCOR),

respondent.

H .B . Basco & Associates for petitioners.

Valmonte Law Offices collaborating counsel for petitioners.

Aquirre, Laborte and Capule for respondent PAGCOR.SYLLABUS

1.STATUTORY CONSTRUCTION; PRESUMPTION OF VALIDITY OF STATUTE; MUST BE INDULGED IN

FAVOR OF ITS CONSTITUTIONALITY. As We enter upon the task of passing on the validity of an

act of a co-equal and coordinate branch of the government We need not be reminded of the time-

honored principle, deeply ingrained in our jurisprudence, that a statute is presumed to be valid.

Every presumption must be indulged in favor of its constitutionality. This is not to say that We

approach Our task with diffidence or timidity. Where it is clear that the legislature or the

executive for that matter, has over-stepped the limits of its authority under the constitution, We

should not hesitate to wield the axe and let it fall heavily, as fall it must, on the offending statute

(Lozano v. Martinez, supra). In Victoriano v. Elizalde Rope Workers' Union, et al, 59 SCRA 54, the

Court thru Mr. Justice Zaldivar underscored the ". . . thoroughly established principle which

must be followed in all cases where questions of constitutionality as obtain in the instant cases are

involved. All presumptions are indulged in favor of constitutionality; one who attacks a statute

alleging unconstitutionality must prove its invalidity beyond a reasonable doubt; that a law may

work hardship does not render it unconstitutional; that if any reasonable basis may be conceived

which supports the statute, it will be upheld and the challenger must negate all possible basis;

that the courts are not concerned with the wisdom, justice, policy or expediency of a statute and

that a liberal interpretation of the constitution in favor of the constitutionality of legislation should

be adopted." (Danner v. Hass, 194 N.W. 2nd 534, 539, Spurbeck v. Statton, 106 N.W. 2nd 660,

663; 59 SCRA 66; see also e.g. Salas v. Jarencio, 46 SCRA 734, 739 [1970]; Peralta v. Commission on

Elections, 82 SCRA 30, 55 [1978]; and Heirs of Ordona v. Reyes, 125 SCRA 220, 241-242 [1983]

cited in Citizens Alliance for Consumer Protection v. Energy Regulatory Board, 162 SCRA 521, 540).

cdasia

2.ID.; IN NULLIFYING A LAW, IT MUST BE SHOWN THAT THERE IS A CLEAR AND UNEQUIVOCAL

BREACH OF THE CONSTITUTION. Every law has in its favor the presumption of constitutionality

(Yu Cong Eng v. Trinidad, 47 Phil. 387; Salas v. Jarencio, 48 SCRA 734; Peralta v. Comelec, 82 SCRA

30; Abbas v. Comelec, 179 SCRA 287). Therefore, for PD 1869 to be nullified, it must be shown that

there is a clear and unequivocal breach of the Constitution, not merely a doubtful and equivocal

one. In other words, the grounds for nullity must be clear and beyond reasonable doubt. (Peraltav. Comelec, supra) Those who petition this Court to declare a law, or parts thereof,

unconstitutional must clearly establish the basis for such a declaration. Otherwise, their petition

must fail. Based on the grounds raised by petitioners to challenge the constitutionality of P.D.

1869, the Court finds that petitioners have failed to overcome the presumption. The dismissal of

this petition is therefore, inevitable. But as to whether P.D. 1869 remains a wise legislation

considering the issues of "morality, monopoly, trend to free enterprise, privatization as well as the

state principles on social justice, role of youth and educational values" being raised, is up for

Congress to determine.

3.POLITICAL LAW; JUDICIAL DEPARTMENT; TECHNICALITIES OF PROCEDURE MAY BE BRUSHED

ASIDE FOR THE PROPER EXERCISE OF ITS POWERS. Considering however the importance to the

public of the case at bar, and in keeping with the Court's duty, under the 1987 Constitution, to

determine whether or not the other branches of government have kept themselves within the

limits of the Constitution and the laws and that they have not abused the discretion given to

them, the Court has brushed aside technicalities of procedure and has taken cognizance of this

petition. (Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas Inc. v. Tan, 163 SCRA 371)

"With particular regard to the requirement of proper party as applied in the cases before us, We

hold that the same is satisfied by the petitioners and intervenors because each of them has

sustained or is in danger of sustaining an immediate injury as a result of the acts or measures

complained of and even if, strictly speaking they are not covered by the definition, it is still within

the wide discretion of the Court to waive the requirement and so remove the impediment to its

addressing and resolving the serious constitutional questions raised. "In the first Emergency

Powers Cases, ordinary citizens and taxpayers were allowed to question the constitutionality of

several executive orders issued by President Quirino although they were involving only an indirect

and general interest shared in common with the public. The Court dismissed the objection that

they were not proper parties and ruled that 'the transcendental importance to the public of these

cases demands that they be settled promptly and definitely, brushing aside, if we must

technicalities of procedure.' We have since then applied the exception in many other cases."

(Association of Small Landowners in the Philippines, Inc. v. Sec. of Agrarian Reform, 175 SCRA

343).

4.ID.; ID.; NO POWER TO SETTLE POLICY ISSUES. Anent petitioners' claim that PD 1869 is

contrary to the "avowed trend of the Cory Government away from monopolies and crony

economy and toward free enterprise and privatization" suffice it to state that this is not a ground

for this Court to nullify P.D. 1869. If, indeed, PD 1869 runs counter to the government's policies

then it is for the Executive Department to recommend to Congress its repeal or amendment. "The

judiciary does not settle policy issues. The Court can only declare what the law is and not what the

law should be. Under our system of government, policy issues are within the domain of the

political branches of government and of the people themselves as the repository of all state

power." (Valmonte v. Belmonte, Jr., 170 SCRA 256.) LLphil5.ID.; CONCEPT OF POLICE POWER; CONSTRUED. The concept of police power is well-

established in this jurisdiction. It has been defined as the "state authority to enact legislation that

may interfere with personal liberty or property in order to promote the general welfare." (Edu v.

Ericta, 35 SCRA 481, 487) As defined, it consists of (1) an imposition or restraint upon liberty or

property, (2) in order to foster the common good. It is not capable of an exact definition but has

been, purposely, veiled in general terms to underscore its all-comprehensive embrace.

(Philippine Association of Service Exporters, Inc. v. Drilon, 163 SCRA 386). Its scope, ever-

expanding to meet the exigencies of the times, even to anticipate the future where it could be

done, provides enough room for an efficient and flexible response to conditions and

circumstances thus assuming the greatest benefits. (Edu v. Ericta, supra). It finds no specific

Constitutional grant for the plain reason that it does not owe its origin to the charter. Along with

the taxing power and eminent domain, it is inborn in the very fact of statehood and sovereignty. It

is a fundamental attribute of government that has enabled it to perform the most vital functions

of governance. Marshall, to whom the expression has been credited, refers to it succinctly as theplenary power of the state "to govern its citizens". (Tribe, American Constitutional Law, 323,

1978). The police power of the State is a power co-extensive with self-protection. and is most

aptly termed the "law of overwhelming necessity." (Rubi v. Provincial Board of Mindoro, 39 Phil.

660, 708) It is "the most essential, insistent, and illimitable of powers." (Smith Bell & Co. v.

National, 40 Phil. 136) It is a dynamic force that enables the state to meet the exigencies of the

winds of change.

6.PHILIPPINE AMUSEMENT AND GAMING CORPORATION (P.D. NO. 1869); PURPOSE FOR ITS

CREATION. P.D. 1869 was enacted pursuant to the policy of the government to "regulate and

centralize thru an appropriate institution all games of chance authorized by existing franchise or

permitted by law" (1st whereas clause, PD 1869). As was subsequently proved, regulating and

centralizing gambling operations in one corporate entity the PAGCOR, was beneficial not just to

the Government but to society in general. It is a reliable source of much needed revenue for the

cash strapped Government. It provided funds for social impact projects and subjected gambling to

"close scrutiny, regulation, supervision and control of the Government" (4th Whereas Clause, PD


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the assailed legislation may possibly offend some provisions of the Constitution. The Court notes,

further, in this respect that petitioners have in the main put in question the wisdom, justice and

expediency of the establishment of the OPSF, issues which are not properly addressed to this

Court and which this Court may not constitutionally pass upon. Those issues should be addressed

rather to the political departments of government: the President and the Congress." cda

PADILLA, J., concurring:

1.POLITICAL LAW; LEGISLATIVE AND EXECUTIVE DEPARTMENT; VESTED WITH POWER TO DECIDE

STATE POLICY. J. Padilla concur in the result of the learned decision penned by my brother Mr.

Justice Paras. This means that I agree with the decision insofar as it holds that the prohibition,

control, and regulation of the entire activity known as gambling properly pertain to "state policy."

It is, therefore, the political departments of government, namely, the legislative and the executive

that should decide on what government should do in the entire area of gambling, and assume full

responsibility to the people for such policy. The courts, as the decision states, cannot inquire into

the wisdom, morality or expediency of policies adopted by the political departments of

government in areas which fall within their authority, except only when such policies pose a clear

and present danger to the life, liberty or property of the individual. This case does not involve such

a factual situation.

2.ID.; LEGISLATIVE DEPARTMENT; MUST OUTLAW ALL FORMS OF GAMBLING, AS A

FUNDAMENTAL STATE OF POLICY; REASON THEREFOR. J. Padilla hasten to make of record that I

do not subscribe to gambling in any form. It demeans the human personality, destroys self-

confidence and eviscerates one's self-respect, which in the long run will corrode whatever is left of

the Filipino moral character. Gambling has wrecked and will continue to wreck families and

homes; it is an antithesis to individual reliance and reliability as well as personal industry which

are the touchstones of real economic progress and national development. Gambling is

reprehensible whether maintained by government or privatized. The revenues realized by thegovernment out of "legalized" gambling will, in the long run, be more than offset and negated by

the irreparable damage to the people's moral values. Also, the moral standing of the government

in its repeated avowals against "illegal gambling" is fatally flawed and becomes untenable when it

itself engages in the very activity it seeks to eradicate. One can go through the Court's decision

today and mentally replace the activity referred to therein as gambling, which is legal only

because it is authorized by law and run by the government, with the activity known as

prostitution. Would prostitution be any less reprehensible were it to be authorized by law,

franchised, and "regulated" by the government, in return for the substantial revenues it would

yield the government to carry out its laudable projects, such as infrastructure and social

amelioration? The question, I believe, answers itself. I submit that the sooner the legislative

department outlaws all forms of gambling, as a fundamental state policy, and the sooner the

executive implements such policy, the better it will be for the nation.

D E C I S I O N

PARAS, J p:A TV ad proudly announces:

"The new PAGCOR responding through responsible gaming."

But the petitioners think otherwise, that is why, they filed the instant petition seeking to annul the

Philippine Amusement and Gaming Corporation (PAGCOR) Charter PD 1869, because it is

allegedly contrary to morals, public policy and order, and because

"A.It constitutes a waiver of a right prejudicial to a third person with a right recognized by law. It

waived the Manila City government's right to impose taxes and license fees, which is recognized

by law;

"B.For the same reason stated in the immediately preceding paragraph, the law has intruded into

the local government's right to impose local taxes and license fees. This, in contravention of the

constitutionally enshrined principle of local autonomy;

"C.It violates the equal protection clause of the constitution in that it legalizes PAGCOR

conducted gambling, while most other forms of gambling are outlawed, together with

prostitution, drug trafficking and other vices;

"D.It violates the avowed trend of the Cory government away from monopolistic and crony

economy, and toward free enterprise and privatization." (p. 2, Amended Petition; p. 7, Rollo)

In their Second Amended Petition, petitioners also claim that PD 1869 is contrary to the declared

national policy of the "new restored democracy" and the people's will as expressed in the 1987

Constitution. The decree is said to have a "gambling objective" and therefore is contrary to

Sections 11, 12 and 13 of Article II, Sec. 1 of Article VIII and Section 3 (2) of Article XIV, of the

present Constitution (p. 3, Second Amended Petition; p. 21, Rollo). cdasia

The procedural issue is whether petitioners, as taxpayers and practicing lawyers (petitioner Basco

being also the Chairman of the Committee on Laws of the City Council of Manila), can question

and seek the annulment of PD 1869 on the alleged grounds mentioned above.

The Philippine Amusements and Gaming Corporation (PAGCOR) was created by virtue of P.D.

1067-A dated January 1, 1977 and was granted a franchise under P.D. 1067-B also dated January

1, 1977 "to establish, operate and maintain gambling casinos on land or water within the

territorial jurisdiction of the Philippines." Its operation was originally conducted in the well known

floating casino "Philippine Tourist." The operation was considered a success for it proved to be a

potential source of revenue to fund infrastructure and socioeconomic projects, thus, P.D. 1399

was passed on June 2, 1978 for PAGCOR to fully attain this objective.

Subsequently, on July 11, 1983, PAGCOR was created under P.D. 1869 to enable the Government

to regulate and centralize all games of chance authorized by existing franchise or permitted by

law, under the following declared policy

"Section 1.Declaration of Policy. It is hereby declared to be the policy of the State to centralize

and integrate all games of chance not heretofore authorized by existing franchises or permitted bylaw in order to attain the following objectives:

"(a)To centralize and integrate the right and authority to operate and conduct games of chance

into one corporate entity to be controlled, administered and supervised by the Government.

"(b)To establish and operate clubs and casinos, for amusement and recreation, including sports

gaming pools, (basketball, football, lotteries, etc.) and such other forms of amusement and

recreation including games of chance, which may be allowed by law within the territorial

jurisdiction of the Philippines and which will: (1) generate sources of additional revenue to fund

infrastructure and socio-civic projects, such as flood control programs, beautification, sewerage

and sewage projects, Tulungan ng Bayan Centers, Nutritional Programs Population Control and

such other essential public services; (2) create recreation and integrated facilities which will

expand and improve the country's existing tourist attractions; and (3) minimize, if not totally

eradicate, all the evils, malpractices and corruptions that are normally prevalent on the conduct

and operation of gambling clubs and casinos without direct government involvement." (Section 1,

P.D. 1869)To attain these objectives PAGCOR is given territorial jurisdiction all over the Philippines. Under its

Charter's repealing clause, all laws, decrees, executive orders, rules and regulations, inconsistent

therewith, are accordingly repealed, amended or modified.

It is reported that PAGCOR is the third largest source of government revenue, next to the Bureau

of Internal Revenue and the Bureau of Customs. In 1989 alone,PAGCOR earned P3.43 Billion, and

directly remitted to the National Government a total of P2.5 Billion in form of franchise tax,

government's income share, the President's Social Fund and Host Cities' share. In addition,

PAGCOR sponsored other socio-cultural and charitable projects on its own or in cooperation with

various governmental agencies, and other private associations and organizations. In its 3 1/2 years

of operation under the present administration, PAGCOR remitted to the government a total of

P6.2 Billion. As of December 31, 1989, PAGCOR was employing 4,494 employees in its nine (9)

casinos nationwide, directly supporting the livelihood of Four Thousand Four Hundred Ninety-Four

(4,494) families. LLjur


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15

But the petitioners, are questioning the validity of P.D. No. 1869. They allege that the same is "null

and void" for being "contrary to morals, public policy and public order," monopolistic and tends

toward "crony economy", and is violative of the equal protection clause and local autonomy as

well as for running counter to the state policies enunciated in Sections 11 (Personal Dignity and

Human Rights), 12 (Family) and 13 (Role of Youth) of Article II, Section 1 (Social Justice) of Article

XIII and Section 2 (Educational Values) of Article XIV of the 1987 Constitution.

This challenge to P.D. No. 1869 deserves a searching and thorough scrutiny and the most

deliberate consideration by the Court, involving as it does the exercise of what has been described

as "the highest and most delicate function which belongs to the judicial department of the

government." (State v. Manuel, 20 N.C. 144; Lozano v. Martinez, 146 SCRA 323).

As We enter upon the task of passing on the validity of an act of a co-equal and coordinate branch

of the government We need not be reminded of the time-honored principle, deeply ingrained in

our jurisprudence, that a statute is presumed to be valid. Every presumption must be indulged in

favor of its constitutionality. This is not to say that We approach Our task with diffidence or

timidity. Where it is clear that the legislature or the executive for that matter, has over-stepped

the limits of its authority under the constitution, We should not hesitate to wield the axe and let it

fall heavily, as fall it must, on the offending statute (Lozano v. Martinez, supra).

In Victoriano v. Elizalde Rope Workers' Union, et al, 59 SCRA 54, the Court thru Mr. Justice Zaldivar

underscored the

". . . thoroughly established principle which must be followed in all cases where questions of

constitutionality as obtain in the instant cases are involved. All presumptions are indulged in favor

of constitutionality; one who attacks a statute alleging unconstitutionality must prove its invalidity

beyond a reasonable doubt; that a law may work hardship does not render it unconstitutional;

that if any reasonable basis may be conceived which supports the statute, it will be upheld and the

challenger must negate all possible basis; that the courts are not concerned with the wisdom,justice, policy or expediency of a statute and that a liberal interpretation of the constitution in

favor of the constitutionality of legislation should be adopted." (Danner v. Hass, 194 N.W. 2nd

534, 539, Spurbeck v. Statton, 106 N.W. 2nd 660, 663; 59 SCRA 66; see also e.g. Salas v. Jarencio,

46 SCRA 734, 739 [1970]; Peralta v. Commission on Elections, 82 SCRA 30, 55 [1978]; and Heirs of

Ordona v. Reyes, 125 SCRA 220, 241-242 [1983] cited in Citizens Alliance for Consumer Protection

v. Energy Regulatory Board, 162 SCRA 521, 540).

Of course, there is first, the procedural issue. The respondents are questioning the legal

personality of petitioners to file the instant petition.

Considering however the importance to the public of the case at bar, and in keeping with the

Court's duty, under the 1987 Constitution, to determine whether or not the other branches of

government have kept themselves within the limits of the Constitution and the laws and that they

have not abused the discretion given to them, the Court has brushed aside technicalities of

procedure and has taken cognizance of this petition. (Kapatiran ng mga Naglilingkod sa

Pamahalaan ng Pilipinas Inc. v. Tan, 163 SCRA 371) dctai"With particular regard to the requirement of proper party as applied in the cases before us, We

hold that the same is satisfied by the petitioners and intervenors because each of them has

sustained or is in danger of sustaining an immediate injury as a result of the acts or measures

complained of and even if, strictly speaking they are not covered by the definition, it is still within

the wide discretion of the Court to waive the requirement and so remove the impediment to its

addressing and resolving the serious constitutional questions raised.

"In the first Emergency Powers Cases, ordinary citizens and taxpayers were allowed to question

the constitutionality of several executive orders issued by President Quirino although they were

involving only an indirect and general interest shared in common with the public. The Court

dismissed the objection that they were not proper parties and ruled that 'the transcendental

importance to the public of these cases demands that they be settled promptly and definitely,

brushing aside, if we must, technicalities of procedure.' We have since then applied the exception

in many other cases." (Association of Small Landowners in the Philippines, Inc. v. Sec. of Agrarian

Reform, 175 SCRA 343).

Having disposed of the procedural issue, We will now discuss the substantive issues raised.

Gambling in all its forms, unless allowed by law, is generally prohibited. But the prohibition of

gambling does not mean that the Government cannot regulate it in the exercise of its police

power.

The concept of police power is well-established in this jurisdiction. It has been defined as the

"state authority to enact legislation that may interfere with personal liberty or property in order

to promote the general welfare." (Edu v. Ericta, 35 SCRA 481, 487) As defined, it consists of (1) an

imposition or restraint upon liberty or property, (2) in order to foster the common good. It is not

capable of an exact definition but has been, purposely, veiled in general terms to underscore its

all-comprehensive embrace. (Philippine Association of Service Exporters, Inc. v. Drilon, 163 SCRA

386).

Its scope, ever-expanding to meet the exigencies of the times, even to anticipate the future where

it could be done, provides enough room for an efficient and flexible response to conditions and

circumstances thus assuming the greatest benefits. (Edu v. Ericta, supra).

It finds no specific Constitutional grant for the plain reason that it does not owe its origin to the

charter. Along with the taxing power and eminent domain, it is inborn in the very fact of

statehood and sovereignty. It is a fundamental attribute of government that has enabled it to

perform the most vital functions of governance. Marshall, to whom the expression has been

credited, refers to it succinctly as the plenary power of the state "to govern its citizens". (Tribe,

American Constitutional Law, 323, 1978). The police power of the State is a power co-extensive

with self-protection. and is most aptly termed the "law of overwhelming necessity." (Rubi v.

Provincial Board of Mindoro, 39 Phil. 660, 708) It is "the most essential, insistent, and illimitable of

powers." (Smith Bell & Co. v. National, 40 Phil. 136) It is a dynamic force that enables the state to

meet the exigencies of the winds of change.What was the reason behind the enactment of P.D. 1869?

P.D. 1869 was enacted pursuant to the policy of the government to "regulate and centralize thru

an appropriate institution all games of chance authorized by existing franchise or permitted by

law" (1st whereas clause, PD 1869). As was subsequently proved, regulating and centralizing

gambling operations in one corporate entity the PAGCOR, was beneficial not just to the

Government but to society in general. It is a reliable source of much needed revenue for the cash

strapped Government. It provided funds for social impact projects and s

consti ii cases - taxation

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