Case Summary (G.R. No. L-11176)
Key Dates
Assessments issued (first): November 19, 1953 (P1,203.50 for 4th quarter 1946–1953).
Supplemental assessment issued: covering 1954–1955 (P332.00).
Appeal to Court of Tax Appeals: June 1, 1955.
Decision of the Supreme Court (appeal): June 29, 1959.
Applicable Law and Administrative Materials
Primary statutory provisions invoked: Sections 178 and 193 (subsections (i), (k) and (n)) of the Tax Code (entitled generally under Title V, “Privilege Taxes on Business and Occupation”), and Section 194 (definitions) as quoted in the record. The Revised Administrative Code (section 1464) was the source of an earlier classification, and a 1921 Bureau of Internal Revenue ruling asserted that clubs selling exclusively to members should pay the corresponding privilege tax. The appropriate constitution for the period and legal context is the 1935 Philippine Constitution.
Uncontested Facts
- Manila Lodge No. 761 is a duly incorporated fraternal, civic, non‑stock, non‑profit club.
- The Lodge maintained a clubhouse where it sold liquor, fermented liquor, cigars and cigarettes only to members and their guests.
- Sales were on a very limited scale and produced only a margin intended to cover operational expenses; there was no intent to obtain profit.
- BIR agents discovered nonpayment of fixed privilege taxes for retail liquor dealers, retail dealers in fermented liquor, and retail tobacco dealers for the periods in question.
- The Collector assessed the Lodge for fixed taxes under section 193; the Conference Staff of the BIR upheld the assessment; the Court of Tax Appeals ruled in favor of the Lodge; the Collector appealed.
Issues Presented on Appeal
The Collector advanced the following principal assignments of error:
- That the Court of Tax Appeals erred in reversing the Collector’s decision that assessed fixed privilege taxes against the Lodge.
- That the CTA erred in holding that the Lodge’s liability for privilege taxes attaches only if it is engaged in the “business” of selling liquor and tobacco.
- That the CTA erred in holding that a fraternal, civic, non‑stock, non‑profit organization selling to members and guests at cost or with minimal margin is not liable for fixed privilege taxes applicable to retail dealers.
- That the CTA erred in holding the BIR’s administrative construction (the 1921 ruling) inconsistent with the Revised Administrative Code and the Tax Code.
Statutory Texts Central to the Dispute
- Section 178 (Payment of privilege taxes): a privilege tax must be paid before any “business or occupation” specified can lawfully be begun or pursued; the tax on business is payable for each separate establishment; one occupation does not become exempt by being conducted with another for which tax has been paid.
- Section 193 (Amount of tax on business): prescribes fixed taxes for various categories, including (i) retail liquor dealers, (k) retail dealers in fermented liquors, and (n) retail tobacco dealers.
- Section 194 (Words and phrases defined): provides definitions for terms such as “retail liquor dealer,” “retail dealer in fermented liquors,” and “tobacco dealer,” but these definitional phrases are situated within the same statutory framework that repeatedly references “business.”
Court of Tax Appeals’ Reasoning (as quoted)
The CTA interpreted the Tax Code in context and concluded that the privilege taxes of section 193, read together with section 178 and the Title V heading, apply to persons engaged in the “business” of selling the enumerated goods. The CTA relied on ordinary dictionary definitions and judicial authorities to construe “business” as activities engaged in with a view to profit or livelihood. Because the Lodge’s sales were limited, exclusive to members and guests, and intended only to cover operational expenses without profit, the CTA concluded the Lodge was not engaged in the business of selling liquor and tobacco and therefore not liable for the fixed privilege taxes.
Supreme Court’s Analysis of the Statutory Language and Context
The Supreme Court affirmed the CTA’s approach to statutory construction. Key points of analysis included:
- The phrase “retail liquor dealers,” “retail dealers in fermented liquors,” and “retail tobacco dealers” in section 193 must be read in the integrated context of the Tax Code, especially section 178 and the Title V heading (“Privilege Taxes on Business and Occupation”).
- Section 193 is entitled “Amount of tax on business” and is an implementation of section 178’s general rule that privilege taxes are imposed only on specified businesses or occupations. The Court emphasized that “business” appears repeatedly in section 178 and in the Tax Code’s structure.
- The Court reasoned that the ordinary and legal meaning of “business” denotes habitual or regular activity carried on with a view to profit or livelihood. Because section 193 uses the term within that overall framework, the enumerations in section 193 are properly understood to target those engaged in trade or commerce for profit, not nonprofit fraternal organizations making incidental, non‑profit sales to members and guests.
Treatment of Statutory Definitions in Section 194
The Collector argued that the specific definitions in section 194 (defining “retail liquor dealer,” “retail dealer in fermented liquors,” and “tobacco dealer”) should control and automatically bring clubs selling such products within the taxed categories. The Court rejected a compartmentalized reading: while the definitions in section 194 are relevant, they must be read and given effect in harmony with the other provisions (sections 178 and 193) and the statutory scheme as a whole. Thus, the Court held that the defined phrases denote persons engaged in the business of retailing the specified products, not nonprofit clubs whose sales are incidental and not conducted for profit.
Administrative Ruling of 1921 and Legislative Reenactment Argument
The Collector relied on a 1921 BIR ruling that clubs selling exclusively to their members should pay the corresponding privilege tax, asserting that the doctrine had legislative approval via reenactment of section 1464 as section 193. The Court addressed this argument by:
- Noting that even if a BIR ruling existed, its application must be consistent with the statute
Case Syllabus (G.R. No. L-11176)
Procedural posture and disposition
- Appeal by the Collector of Internal Revenue from a decision of the Court of Tax Appeals (CTA) reversing and setting aside the Collector’s assessment dated November 19, 1953, and holding that Manila Lodge No. 761 (Elks Club) is not liable for privilege taxes on its retail sales of liquor and tobacco exclusively to members and their guests.
- The CTA had granted relief to the club from two assessments: one for P1,203.50 (period: 4th quarter 1946 to 1953, exclusive of suggested compromise penalty of P80.00) and another for P332.00 (period: 1954–1955, exclusive of suggested compromise penalty of P50.00).
- The Supreme Court affirmed the CTA decision, without special pronouncement as to costs.
- Justices Paras, C. J., Bengzon, Padilla, Montemayor, Bautista Angelo, Endencia and Barrera concurred.
Undisputed facts
- Manila Lodge No. 761 is a fraternal, civic, non-stock, non-profit organization duly incorporated under Philippine laws.
- The Club owns and operates a clubhouse on Dewey Boulevard, Manila.
- The Club sells at retail liquor, fermented liquor, cigars and cigarettes only to its members and their guests.
- Bureau of Internal Revenue (BIR) agents discovered that the Club had not paid privilege taxes for retail liquor dealer (B-4), retail dealer in fermented liquor (B-7), and retail tobacco dealer (B-9-a) for the periods in question.
- On November 19, 1953, the Collector assessed P1,203.50 for the period 4th quarter 1946 to 1953; later, another assessment for P332.00 covered years 1954–1955. The Club sought review by the BIR Conference Staff, which upheld the assessment; the Club then appealed to the CTA on June 1, 1955 and filed a supplemental petition to include the later assessment.
Statutory provisions relied upon
- Section 178, Tax Code: Requires payment of a privilege tax before any business or occupation specified may be lawfully begun or pursued; tax on business payable for every separate establishment; occupation tax payable by each individual engaged; tax on a business by the person, firm, or company conducting the same.
- Section 193, Tax Code: Prescribes fixed annual privilege taxes on business, including:
- (i) Retail liquor dealers — one hundred pesos.
- (k) Retail dealers in fermented liquors — fifty pesos.
- (n) Wholesale tobacco dealers — sixty pesos; retail tobacco dealers — sixteen pesos.
- Section 194, Tax Code (words and phrases defined): Definitions include, inter alia:
- (i) "Retail liquor dealer" includes every person who for himself or on commission sells or offers for sale wine or distilled spirits in quantities of five liters or less at any one time and not for resale.
- (k) "Retail dealer in fermented liquors" includes every person who for himself or on commission sells or offers for sale fermented liquors in quantities of five liters or less at any one time and not for resale.
- (o) "Tobacco dealer" comprehends every person who for himself or on commission sells or offers for sale cigars, cigarettes, or manufactured tobacco.
Core legal issue(s)
- Whether the privilege taxes under subsections (i), (k) and (n) of section 193 of the Tax Code, in relation to section 178, attach to a fraternal, civic, non-stock, non-profit organization that sells liquor, fermented liquor, and tobacco at retail exclusively to its members and their guests and only on a limited scale to cover operational expenses.
- Whether the administrative ruling of the BIR (1921) that clubs selling exclusively to members should pay the corresponding privilege tax is controlling or consistent with the Tax Code.
Positions of the parties
- Collector of Internal Revenue (appellant):
- Maintains that persons selling articles subject to specific tax (e.g., cigars, tobacco, liquor) are subject to the fixed privilege taxes of section 193 irrespective of profit or organizational form.
- Relies on a 1921 BIR ruling to support the position that clubs selling exclusively to members are taxable.
- Asserts the CTA erred in reversing the assessment, in requiring a finding of engagement in "business" before liability attaches, in exempting a fraternal non-stock non-profit selling at retail only to members and guests, and in holding that the BIR administrative construction was outside the ambit of and inconsistent with the Revised Administrative Code and Tax Code.
- Manila Lodge No. 761 (original petitioner in CTA proceedings):
- Claims exemption from privilege taxes because it is not enga