G.R. No. 199752 - Demaala vs. Commission on Audit

Case Summary (G.R. No. 199752)

Factual Background

Provincial Ordinance No. 332-A, Series of 1995 of Palawan adopted a code that included Chapter 5, Section 48, imposing an additional levy for the Special Education Fund (SEF) at the rate of 0.5% of assessed real property value. Acting pursuant to that ordinance, the Municipality of Narra, while Lucena D. Demaala served as mayor, collected the SEF at the 0.5% rate through the municipal treasurer from real property owners within its territory.

Audit Proceedings and Notice of Charge

An Audit Observation Memorandum (AOM No. 03-005) dated August 7, 2003 questioned the SEF levy at 0.5% instead of one percent as stated in Section 235 of the Local Government Code. Thereafter, Regional Cluster Director Rodolfo C. Sy issued Notice of Charge No. 2004-04-101 dated August 30, 2004 in the amount of P1,125,416.56, charging Lucena D. Demaala, the municipal treasurer, and the payors for an alleged deficiency in SEF collections.

Administrative Appeals and Commission on Audit Decisions

The Municipality of Narra, through Demaala, filed a motion for reconsideration which the regional office denied. The municipality then appealed to the Commission on Audit's Legal and Adjudication Office; LAO Local Decision No. 2006-056 dated April 19, 2006 denied the appeal. In Decision No. 2008-087 dated September 22, 2008, the Commission on Audit denied the further appeal and modified the LAO decision by including former Vice-Governor Joel T. Reyes and other members of the Sangguniang Panlalawigan of Palawan as jointly and severally liable with Demaala, the municipal treasurer, and all payors for the P1,125,416.56 deficiency. A motion for reconsideration was denied in Decision No. 2011-083 dated November 16, 2011.

Issues Presented to the Court

The Supreme Court framed two principal issues: (1) whether the Commission on Audit committed grave abuse of discretion amounting to lack or excess of jurisdiction in finding a deficiency in the Municipality of Narra's SEF collections and, subsidiarily, whether a province, city, or a municipality within Metropolitan Manila may levy SEF at a rate less than one percent; and (2) assuming a deficiency existed, whether the Commission on Audit committed grave abuse of discretion in holding Demaala personally liable for the deficiency.

Petitioner’s Contentions

Demaala maintained that the collection at 0.5% complied with Provincial Ordinance No. 332-A, which the Municipality lawfully enforced. She contended that local taxing power under the Constitution and the Local Government Code allowed local government units to set rates responsive to local circumstances and that any ambiguity in Section 235 must be resolved in favor of local fiscal autonomy. She further argued that personal liability could not be imposed for enforcing an ordinance presumed valid and that the Commission on Audit's reliance on Salalima v. Guingona was inapposite.

Respondent’s Position

The Commission on Audit asserted that Section 235 fixed the SEF additional levy at one percent and that local government units lacked discretion on the rate. The Commission on Audit held that the reduced rate resulted in a deficiency and that local officials who implemented or enacted the ordinance creating the reduced rate could be held personally liable for the loss. The Commission relied on precedent, including Salalima v. Guingona, to justify administrative and pecuniary accountability of local officials.

Legal Framework: Taxing Power and Local Autonomy

The Court reiterated that the power to tax is inherent in the state and that local government units exercise taxing power only as prescribed by law. It identified CONST. (1987), Art. X, Sec. 5 as the constitutional source of LGU taxing authority and emphasized the complementary constitutional guarantee of local autonomy in Art. II, Sec. 25 and Art. X, Sec. 2. The Court noted the jurisprudential shift requiring doubts about local taxing powers to be resolved in favor of local autonomy, citing decisions such as City Government of San Pablo v. Reyes and San Juan v. Civil Service Commission.

Interpretation of Section 235 and Statutory Ambiguity

The Court examined the language of Section 235, which provides that a province or city, or a municipality within Metropolitan Manila, "may levy and collect an annual tax of one percent (1%)" for the SEF. The Court observed that the operative verb "may" is permissive and that the statute lacks a qualifying phrase mandating that any local SEF levy must be exactly one percent. Applying the constitutional preference for local autonomy, the Court resolved any statutory ambiguity in favor of LGU fiscal flexibility and held that the one percent rate in Section 235 should be read as a maximum, not an immutable minimum.

Application to the Ordinance and Validity of the 0.5% Levy

Upon holding that Section 235 allowed local governments to levy up to one percent, the Court concluded that the Sangguniang Panlalawigan of Palawan acted within its taxing power in enacting an ordinance that fixed the SEF levy at 0.5%. The Municipality of Narra's enforcement of Chapter 5, Section 48 of Provincial Ordinance No. 332-A therefore did not constitute an erroneous reduction of government income under the statutory scheme as interpreted.

Personal Liability of Local Officials and Distinction from Salalima

The Court found that the Commission on Audit gravely abused its discretion in imposing personal pecuniary liability on Demaala for the supposed deficiency. The Court explained that enforcement of an ordinance presumed

Case Syllabus (G.R. No. 199752)

Parties and Posture

Lucena D. Demaala filed a Petition for Certiorari seeking annulment of two administrative adjudications by Commission on Audit alleging deficiency in Special Education Fund (SEF) collections.
Commission on Audit issued Decision No. 2008-087 denying Demaala's appeal and Decision No. 2011-083 denying her motion for reconsideration.
The petition contested the validity of a provincial ordinance of Palawan and the imposition of personal liability on petitioner for an alleged shortfall amounting to PHP 1,125,416.56.

Key Factual Allegations

The Sangguniang Panlalawigan of Palawan enacted Provincial Ordinance No. 332-A, Series of 1995 which set an SEF additional levy at one-half percent (0.5%) of assessed property value.
The Municipality of Narra, with Lucena D. Demaala as mayor, collected the SEF at the rate of 0.5% through its municipal treasurer pursuant to the Ordinance.
An Audit Observation Memorandum found an alleged deficiency and Regional Cluster Director Rodolfo C. Sy issued Notice of Charge No. 2004-04-101 charging petitioner, the municipal treasurer, and SEF payors with the deficiency.

Procedural History

The Municipality of Narra filed a Motion for Reconsideration which was denied by Regional Cluster Director Sy and subsequently appealed to the COA Legal and Adjudication Office (LAO).
LAO Local Decision No. 2006-056 affirmed the Notice of Charge and the Commission on Audit upheld that ruling in Decision No. 2008-087, later modifying liability to include members of the Sangguniang Panlalawigan.
Decision No. 2011-083 denied motions for reconsideration and petitioner then filed the present petition before the Supreme Court.

Statutory Framework

Article X, Section 5, 1987 Constitution vests local government units with the power to create their own revenue sources and to levy taxes subject to congressional guidelines and limitations.
Section 235, Local Government Code (RA 7160) authorizes a province or city, or a municipality within the Metropolitan Manila Area, to levy an additional one percent (1%) tax on assessed real property for the SEF, using permissive language "may levy and collect".
Republic Act No. 5447 originally created the Special Education Fund and P.D. No. 464 earlier imposed an annual 1% SEF tax pursuant to that act.
Section 272 and Section 60, RA 7160 concerning distribution of SEF proceeds and grounds for disciplinary action were instrumental in the Court's comparison with prior cases.

Issues Presented

Whether Commission on Audit committed grave abuse of discretion in holding there was a deficiency in Narra's SEF collections where the SEF was levied at 0.5% under a provincial ordinance.
Whether a municipality, city,