Commissioner of Internal Revenue v. Young Men's Christian Association of the Philippines, Inc.

[CA-G.R. SP No. 32007. February 16, 1994.] (C.T.A. Case No. 4347) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC. and THE COURT OF TAX APPEALS , respondents . D E C I S I O N ISNANI , J p : This is a petition for review of a portion of the decision rendered by the respondent Court of Tax Appeals in C.T.A Case No. 4347, the dispositive portion of which states: "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 Contractor's Tax P3,129.23; 1980 Deficiency Income Tax P 372,578.20 while the following assessments are hereby sustained: 1980 Deficiency Expanded Withholding Tax P 1,798.93; 1980 Deficiency Withholding Tax on Wages P 33,058.82 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." The portion of the decision sought to be reviewed is that which dismissed the 1980 assessment for deficiency fixed tax, contractor's tax and income tax in the amounts of P353.15, P3,129.23 and P372,578.20, respectively. The facts of the case as summarized by the respondent court are as follows: "(1) On July 2, 1984, the respondent notified the petitioner that there was found due from the petitioner for the year 1980 the total amount of P415,651.01 as deficiency income tax and interest, expanded withholding taxes on rentals and professional fees, and withholding tax on wages, surcharge and interest. (2) Petitioner timely protested the above-stated deficiency tax assessments, and under date of October 8, 1985, the petitioner filed a supplement to the said basic protests. (3) On February 13, 1989, the petitioner received a copy of the respondent's letter-decision of January 13, 1989, in reply to petitioner's letter-protest dated October 8, 1985. A xerox copy of the respondent's letter-decision of January 13, 1989 is attached hereto as Annex "A". (4) In his letter of January 13, 1989, Annex "A" hereof, the respondent cancelled the following assessment, inclusive of increments, to wit: 1980 Def. Fixed Tax (Real Estate Dealer P7,694.71 1980 Def. Expanded Withholding Tax (Professional Fees) P8,215.06 However, respondent reiterated the following assessments inclusive of increments thereon, namely: 1980 Def. Fixed Tax (as operator of parking lots) P353.15 1980 Def. Contractor's Tax 3,129.73 1980 Def. Income Tax 372,578.20 1980 Def. Expanded Withholding Tax (Rental of Pinsettler) 1,798.93 1980 Def. Withholding Tax on Wages 33,058.82 The issue raised in this petition is: "WHETHER OR NOT THE COLLECTION OR EARNINGS OF RENTAL INCOME FROM LEASE OF CERTAIN PREMISES AND INCOME EARNED FROM PARKING FEES FALL UNDER THE LAST PARAGRAPH OF SECTIONS 27 OF THE NATIONAL INTERNAL REVENUE CODE OF 1977, AS AMENDED." The private respondent is a religious, charitable and educational institution and it is established primarily for the promotion of the social welfare, pleasure, recreation and other non-profitable purposes. Such being the case, it is entitled to certain tax exemptions, as provided for in the Philippine Constitution and as implemented by Section 27(g) and (h) of the Internal Revenue Code. The Constitutional provisions state: Art. VI, Sec. 22, par. 3, of 1935 Constitution states: "Sec. 22. (1) The rule of taxation shall be uniform. (2) The Congress may by law authorize the President, subject to such limitations and restrictions as it may impose, to fix, within specified limits, tariff rates, imposts or export quotas, and tonnage and wharfage dues. (3) Cemeteries, churches, and pardonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable or educational purposes shall be exempt from taxation." Art. VIII, Sec. 17, par. 3 of 1973 Constitution states: "Sec. 17. (1) The rule of taxation shall be uniform and equitable. The National Assembly shall evolve a progressive system of taxation. (2) The National Assembly may by law authorize the Prime Minister to fix within specified limits, and subject to such limitations and restrictions as it may impose, Tariff rates, import and export quotas, tonnages and wharfage dues, and other duties or imposts. (3) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and non-profit cemeteries, and all lands, buildings, and improvements actually, directly, and exclusively used for religious or charitable purposes shall be exempt from taxation." The Internal Revenue Code which partly implements the above-quoted constitutional provisions, provides: "Sec. 27. Exemptions from tax on corporations . The following organizations shall be taxed under this Title in respect to income received by them as such (g) Civil 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 income of which inures to the benefit of any private stockholder or member; Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind or character of the foregoing organizations from any of their properties, real or personal, or from any other activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis supplied)" Expounding on the tax exemption of lands, buildings and improvements as provided for in both the 1935 and 1973 Philippine Constitutions, the Supreme Court in Province of Abra vs. Hernando, 107 SCRA 104, ruled: "1. Respondent Judge would not have erred so grievously had he merely compared the provisions of the present Constitution with that appearing in the 1935 Charter on the tax exemption of "lands, buildings, and improvements." There is a marked difference. Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious. charitable, or educational purposes shall be exempt from taxation." The present Constitution added "charitable institutions, mosques, and non-profit cemeteries" and required that for the exemption of "lands, buildings, and improvements," they should not only be "exclusively" but also "actually" and "directly" used for religious or charitable purposes. The Constitution is worded differently. The change should not be ignored. It must be duly taken into consideration. Reliance on past decisions would have sufficed were the words "actually" as well as "directly" not added. There must be proof therefore of the actual and direct use of the lands, buildings, and improvements for religious or charitable purposes to be exempt from taxation. According to Commissioner of Internal Revenue v. Guerrero: "From 1906, in Catholic Church v. Hastings to 1966, in Esso Standard Eastern, Inc. v. Acting Commissioner of Customs, it has been the constant and uniform holding that exemption from taxation is not favored and is never presumed, so that if granted it must be strictly construed against the taxpayer. Affirmatively put, the law frowns on exemption from taxation, hence, an exempting provision should be construed strictissimi juris ." In Abra Valley College Inc. vs. Aquino, 162 SCRA 106, the Supreme Court ruled: "The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71 Phil. 547 (1941). It must be stressed however, that while this Court allows a more liberal and non-restrictive interpretation of the phrase "exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935 Constitution, reasonable emphasis has always been made that exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the use of the school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of the second floor of the main building in the case at bar for residential purposes of the Director and his family, may find justification under the concept of incidental use, which is complimentary to the main or primary purpose educational, the lease of the first floor thereof to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of education. xxx xxx xxx Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building as well as the lot where it is built, should be taxed, not because the second floor of the same is being used by the Director and his family for residential purposes, but because the first floor thereof is being used for commercial purposes. However, since only a portion is used for purposes of commerce, it is only fair that half of the assessed tax be returned to the school involved." 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 petitioner's (respondent herein) facilities to small shop owners, to restaurant and canteen operators and the operation of 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 P353.15 1980 Deficiency Contractor's Tax 3,129.23, & 1980 Deficiency Income Tax 372,578.20 but the same is AFFIRMED in all other respect. SO ORDERED. De Pano, Jr . and Ibay Somera, JJ ., concur.