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.
tax assessments
rental income
educational purposes

Case Summary (G.R. No. 196596)

Factual Background

In 2004 the Bureau of Internal Revenue issued LOA No. 2794 authorizing audit of DLSU for "Fiscal Year Ending 2003 and Unverified Prior Years." The BIR assessed deficiencies by Formal Letter of Demand dated August 18, 2004, claiming income tax on rental earnings from restaurants, canteens and bookstores on campus, VAT on business income, and documentary stamp tax on loans and leases, demanding payment of P17,303,001.12 for taxable years 2001, 2002 and 2003 inclusive of surcharge, interest and penalties. DLSU protested and, upon inaction by the Commissioner, filed a petition for review with the CTA Division on August 3, 2005. DLSU is an undisputed non-stock, non-profit educational institution.

Trial Court Proceedings and CTA Division rulings

The CTA Special First Division on January 5, 2010 partially granted DLSU's petition by cancelling certain DST assessments but ordering payment of deficiency income tax, VAT and DST on lease contracts for 2001–2003 totaling P18,421,363.53, plus computed interest. DLSU moved for reconsideration and, after it formally offered supplemental documentary evidence on May 18, 2010, the CTA Division on July 29, 2010 amended its decision and substantially reduced DLSU’s tax liabilities to P5,506,456.71 for the fiscal years in question. The CTA Division relied on material submitted and on a court-commissioned Independent Certified Public Accountant (Independent CPA) to verify voluminous records.

CTA En Banc rulings in CTA En Banc Case No. 622

In the Commissioner’s appeal docketed as CTA En Banc Case No. 622, the CTA En Banc dismissed the Commissioner’s petition and sustained the CTA Division’s findings. The En Banc held that revenues and assets actually, directly and exclusively used for educational purposes were exempt under Article XIV, Section 4 (3). It accepted that a portion of DLSU’s rental income was proved to have been used to service a loan for construction of the Physical Education–Sports Complex and thus was tax-exempt. The En Banc also found that DLSU proved remittance of documentary stamp tax on its loan and mortgage documents by virtue of a bank’s On-Line Electronic DST Imprinting Machine imprint, consistent with Section 200(D) of the Tax Code and RR No. 15-2001. The En Banc additionally ruled that DLSU’s supplemental evidence was admissible because proceedings before the CTA are not strictly bound by technical rules of evidence and because the Commissioner failed to timely object.

CTA En Banc rulings in CTA En Banc Case No. 671

In DLSU’s separate appeal docketed as CTA En Banc Case No. 671 the En Banc further reduced DLSU’s liabilities to P2,554,825.47 inclusive of surcharge. The En Banc held that the LOA in the form "Fiscal Year Ending 2003 and Unverified Prior Years" violated RMO No. 43-90 because LOAs should cover one taxable period and unverified prior years are prohibited; accordingly, assessments for taxable years 2001 and 2002 were void while the assessment for 2003 was valid. The En Banc rejected DLSU’s argument that the Ateneo precedent required identical appreciation of evidence and affirmed the Division’s factual findings that only portions of the rental income were sufficiently substantiated as used actually, directly and exclusively for educational purposes.

Consolidation and questions presented to the Supreme Court

The Commissioner filed G.R. No. 196596 to assail the CTA En Banc December 10, 2010 decision. DLSU filed G.R. No. 198841 to assail the June 8, 2011 decision, and the Commissioner filed G.R. No. 198941 also challenging the June 8, 2011 decision. The Supreme Court consolidated the petitions. The pivotal issues were whether revenues and income proved to be used actually, directly and exclusively for educational purposes are tax-exempt; whether the LOA was entirely void; whether the CTA properly admitted DLSU’s supplemental evidence; and whether the CTA’s factual appreciation should be disturbed.

Parties’ main contentions

The Commissioner of Internal Revenue argued that Section 30 (H) of the Tax Code subjects income from properties or activities conducted for profit to tax regardless of disposition, so DLSU’s rental income is taxable irrespective of use; that DLSU failed to prove payment of DST and lacked authority to use the on-line DST imprinting machine; and that DLSU’s supplemental evidence was belated and improperly reopened trial. De La Salle University, Inc. contended that the constitutional text of Article XIV, Section 4 (3) grants a categorical exemption for all revenues and assets used actually, directly and exclusively for educational purposes; that the LOA was void under RMO No. 43-90 in toto because it followed the prohibited format; that its evidence was similar to successful proof in the Ateneo case and should be appreciated uniformly; and that the Commissioner’s failure to timely object to supplemental evidence estopped her from contesting its admission.

Supreme Court’s principal holdings

The Supreme Court held that the revenues, income and assets of non-stock, non-profit educational institutions which are proved to have been used actually, directly and exclusively for educational purposes are exempt from duties and taxes under Article XIV, Section 4 (3), 1987 Constitution. The Court declared the last paragraph of Section 30 of the Tax Code without force and effect insofar as it purports to subject to tax the income and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes. The Court held that the LOA issued to DLSU was not entirely void: the 2003 taxable year was specifically indicated and thus validly audited, while assessments for 2001 and 2002 were void for failure to specify separate taxable periods as required by RMO No. 43-90. The Court affirmed admission of DLSU’s supplemental evidence because the Commissioner failed to timely object and because the CTA is not strictly bound by technical rules of evidence. The Court also sustained the CTA’s factual findings that DLSU proved actual, direct and exclusive use of a portion of its rental income for educational purposes and that DLSU proved payment of DST by imprint from the bank’s on-line DST machine, but it revised the CTA’s computation of the taxable base for 2003.

Constitutional and statutory analysis

The Court adopted prior reasoning in Commissioner v. YMCA regarding the requisites for exemption under Article XIV, Section 4 (3): the taxpayer must be a non-stock, non-profit educational institution and must prove actual, direct and exclusive use of the revenues or assets for educational purposes. The Court distinguished the constitutional grant from Article VI, Section 28(3) and emphasized that the 1987 Constitution expressly added the term "revenues," thereby broadening the tax privilege for non-stock, non-profit educational institutions. The Court found that the Tax Code cannot cabin this constitutional exemption by statutory proviso; accordingly, the Tax Code’s provision subjecting income from properties or profit activities to tax is without force and effect in respect of constitutionally exempt revenues and assets once the constitutional conditions are met. The Court treated revenues and assets separately when identifying the specific tax from which exemption follows (income tax, VAT, LBT for revenues; real property tax for assets).

LOA and RMO No. 43-90 analysis

Applying RMO No. 43-90, the Court concluded that the LOA’s inclusion of "Unverified Prior Years" violated the RMO’s prohibition of LOAs covering unverified prior years. Nevertheless, the RMO does not render a noncompliant LOA void in toto when it specifically identifies at least one taxable period. Because the LOA expressly covered "Fiscal Year Ending 2003," the audit and assessment for 2003 were valid; assessments for 2001 and 2002 were void for lack of separate specification. The Court rejected the Commissioner’s estoppel argument that DLSU failed to raise the LOA issue below, noting the LOA’s validity was litigated during trial and in memoranda.

Admission of supplemental evidence

The Court sustained the CTA’s admission of DLSU’s supplemental documentary evidence offered with its motion for reconsideration on two grounds. First, the Commissioner received notice yet failed to timely object; her belated objection on appeal was therefore untimely and the offered evidence became part of the record. Second, the CTA’s enabling statute and rules permit liberal admission of evidence because proceedings before the CTA "shall not be governed strictly by the technical rules of evidence," and the paramount concern is ascertainment of truth. The Court cited precedent admitting documents filed with motions for reconsideration and concluded that liberality is especially proper where a taxpayer asserts a constitutional exemption.

Appreciation of evidence and correction of CTA’s computation

The Court accorded respect to the CTA’s factual findings, including reliance on the Independent CPA who verified records and prepared schedules. The CTA had found that DLSU’s total rental income for 2003 was P10,610,379.00, of which P4,007,724.00 was applied to service the Sports Complex loan and P6,602,655.00 was transferred to the CF-CPA Account. The Independent CPA substantiated CF-CPA disbursements for educational purposes of P6,259,078.30 against total CF-CPA disbursements of P23,463,543.02. The CTA prorated the CF-CPA disbursements by computing a ratio of 26.68% a

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