Title
Commissioner of Internal Revenue vs. De La Salle University, Inc.
Case
G.R. No. 196596
Decision Date
Nov 9, 2016
DLSU contested BIR tax assessments, claiming exemption for income used for education. SC ruled partial exemption, voided invalid LOA for prior years, upheld DST proof, and allowed supplemental evidence.

Case Summary (G.R. No. 196596)

Key Dates and Procedural Posture

BIR audit and assessments initiated in 2004 (LOA No. 2794; PAN May 19, 2004; Formal Letter of Demand Aug. 18, 2004). DLSU filed petition with CTA Division (Aug. 3, 2005). CTA Division decision Jan. 5, 2010 (partially granting relief); amended July 29, 2010 (reducing liabilities after DLSU’s supplemental evidence). CTA En Banc decisions: Dec. 10, 2010 (G.R. No. 196596 appeal by CIR dismissed) and June 8, 2011 (G.R. No. 198841 DLSU petition partially granted). Consolidated petitions to the Supreme Court resulted in the challenged rulings.

Applicable Constitutional and Statutory Law

Primary constitutional provision: 1987 Constitution, Article XIV, Section 4(3) — "All revenues and assets of non‑stock, non‑profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties." Statutory authorities and issuances at issue: Section 30 of the National Internal Revenue Code (Tax Code) (last paragraph as to income from properties), Revenue Memorandum Order (RMO) No. 43‑90 (LOA issuance), Revenue Regulations (RR) No. 15‑2001 (DST imprinting machine rules), RR No. 9‑2000 (on‑line DST imprinting machine), and CTA procedural provisions (not strictly bound by technical rules of evidence).

Factual Background — assessment and claimed exemptions

BIR assessed DLSU for deficiency income tax, VAT and DST for taxable years 2001–2003, alleging rental and other commercial income were taxable; total demand P17,303,001.12 (including penalties). DLSU is a non‑stock, non‑profit educational institution and claimed exemption under Article XIV, Sec. 4(3) based on showing that revenues were used actually, directly and exclusively for educational purposes. DLSU submitted supplemental documentation (statements of receipts/disbursements, fund schedules) offered during reconsideration showing allocation of certain rental proceeds to payment of a loan for a Physical Education (PE) Sports Complex and transfers to a Capital Fund–Capital Projects Account (CF‑CPA).

Procedural history before the CTA

CTA Division initially cancelled DST on loan transactions but sustained income tax/VAT/DST on lease contracts, assessing substantial deficiency (Jan. 5, 2010). DLSU formally offered supplemental evidence in its motion for reconsideration; the CTA Division admitted the evidence and reduced the assessed liabilities (July 29, 2010 amended decision). CTA En Banc then reviewed distinct petitions (one by CIR and one by DLSU), addressing: (a) taxability of rental income; (b) validity of LOA covering "Fiscal Year Ending 2003 and Unverified Prior Years"; (c) admissibility of DLSU’s supplemental evidence; and (d) DST payment issues.

CTA En Banc findings (summary)

  • On rental income: CTA En Banc accepted that a portion of rental income was used actually, directly and exclusively for educational purposes (notably proceeds applied to PE Sports Complex loan) and therefore exempt; other portions lacking documentary proof were taxable.
  • On DST: CTA En Banc found DLSU proved DST payment because loan/mortgage documents bore bank DST imprints, which satisfy RR No. 15‑2001 methods of payment.
  • On LOA validity: CTA En Banc held LOA defective as to unspecified prior years and void as to taxable years 2001–2002, but valid as to the expressly specified Fiscal Year Ending 2003.
  • On supplemental evidence: CTA En Banc upheld admission of DLSU’s supplemental documentary evidence because the CTA is not strictly governed by technical rules of evidence and because the Commissioner failed to timely object.

Issues the Supreme Court resolved

  1. Whether revenues and assets of a non‑stock, non‑profit educational institution that are proved to have been used actually, directly and exclusively for educational purposes are exempt from taxes and duties under the 1987 Constitution.
  2. Whether the LOA covering "Fiscal Year Ending 2003 and Unverified Prior Years" is wholly void.
  3. Whether the CTA properly admitted DLSU’s supplemental evidence offered during reconsideration.
  4. Whether the CTA’s factual appreciation of evidence (including the extent of exempted rental income) may be disturbed.

Supreme Court holding — constitutional exemption (primary rule)

The Court held that under Article XIV, Section 4(3) of the 1987 Constitution, the income, revenues and assets of non‑stock, non‑profit educational institutions that are proved to have been used actually, directly and exclusively for educational purposes are exempt from taxes and duties. The Court declared that the last paragraph of Section 30 of the Tax Code — which purported to subject income from properties and profit activities of exempt organizations to income tax "regardless of the disposition made of such income" — is without force and effect insofar as it purports to deny constitutional exemption to non‑stock, non‑profit educational institutions that meet the constitutional test. The Court adopted and applied the YMCA requisites (classification as non‑stock, non‑profit educational institution; and proof that the income sought to be exempted was used actually, directly and exclusively for educational purposes), but read Article XIV, Sec. 4(3) as broader than prior property‑only exemptions.

Constitutional reasoning and scope of exemption

  • The 1987 Constitution expressly adds "revenues" to the assets protected from tax when used actually, directly and exclusively for educational purposes; that addition signals a broader tax privilege to incentivize private educational provision.
  • Revenues need not be sourced from core educational activities; the constitutional text is unqualified as to source so long as actual, direct and exclusive use for educational purposes is demonstrated.
  • Distinction emphasized between taxation of revenues (income tax, VAT, LBT) and assets (real property tax): an asset used commercially may lose RPT exemption despite its revenues potentially being exempt if those revenues are actually, directly and exclusively used for educational purposes.
  • The exemption is limited to non‑stock, non‑profit educational institutions; proprietary educational institutions remain subject to statutory limitations and different tax treatment.

LOA validity — partial voidness (holding and reasoning)

The Court held the LOA was not wholly void. RMO No. 43‑90 prescribes that an LOA should cover one taxable year and that audits covering more than one period must specify each period. An LOA phrased "Fiscal Year Ending 2003 and Unverified Prior Years" fails RMO 43‑90 insofar as it includes unspecified prior years. The Court therefore sustained the CTA En Banc conclusion: assessments for taxable years 2001 and 2002 (unspecified prior years) are void, but the assessment for taxable year 2003 — which was expressly indicated in the LOA — is valid. The Court rejected the argument that the LOA’s defect required cancellation of the entire LOA and found no basis to nullify the 2003 audit and assessment.

Admissibility of supplemental evidence (holding and rationale)

The Court sustained the CTA Division’s admission of DLSU’s supplemental documentary evidence filed with its motion for reconsideration, on two grounds: (1) the Commissioner failed to timely object to the formal offer — failure to timely object binds the objecting party and makes the evidence part of the record; and (2) proceedings before the CTA are not strictly governed by the technical rules of evidence and the CTA may admit late evidence to ascertain truth and avoid defeating constitutional rights. The Court relied on prior precedent admitting documents attached to motions for reconsideration in tax cases and emphasized liberal treatment when constitutional exemptions are asserted.

Appreciation of evidence and correction of CTA’s arithmetical approach

The Court affirmed that factual findings of the CTA are generally conclusive and entitled to great respect, and may be disturbed only for gross error, lack of substantial evidence, or manifest oversight of undisputed relevant facts. The Court sustained the CTA’s finding that a portion of DLSU’s rental income was used actually, directly and exclusively for educational purposes and that DST payments were remitted through the bank’s DST imprinting machine. However, the Court identified a methodological error in the CTA’s approach to identify the unsubstantiated portion of DLSU’s 2003 rental income.

  • The CTA prorated the substantiated CF‑CPA disbursements (P6,259,078.30) against total CF‑CPA disbursements (P23,463,543.02), obtaining 26.68%, then applied that ratio to DLSU’s portion of rental proceeds placed in CF‑CPA (P6,602,655.00) to arrive at a credited (substantiated) amount (P1,761,588.35), and treated the balance as unsubstantiated.
  • The Supreme Court held this prorating was incorrect in the constitutional exemption context because DLSU sought exemption only for specific revenue items (total rental income P10.61 million) and was required only to prove that those funds were actually and directly used for educational purposes. The Court reasoned that CF‑CPA may have multiple sources and multiple disbursements, but DLSU’s claim concerned the rental proceeds it deposited; where DLSU demonstrated that P6.259 million of the P6.602 million it transferred to CF‑CPA were used for educational purposes, those proceeds should be credited to DLSU without prorating against unrelated CF‑CPA disbursements.

Revised tax base and numerical outcome for taxable year 2003

Applying the corrected method, the Court reduced the tax base for deficiency income tax and VAT for taxable year 2003 as follows: DLSU’s total rental income for 2003 P10,610,379.00; less amounts used to pay loan for Sports Complex P4,007,724.00; less

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