THIRD DIVISION

COMMISSIONER OF INTERNAL G.R. No. 159647

REVENUE,
Petitioner, Present:
Panganiban, J.,
Chairman,
Sandoval-Gutierrez,
- versus - Corona,
Carpio Morales, and
Garcia, JJ
CENTRAL LUZON DRUG Promulgated:
CORPORATION,
Respondent. April 15, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

The 20 percent discount required by the law to be given to senior citizens is a tax credit, not
merely a tax deduction from the gross income or gross sale of the establishment concerned. A tax
credit is used by a private establishment only after the tax has been computed; a tax deduction,
before the tax is computed. RA 7432 unconditionally grants a tax credit to all covered entities.
Thus, the provisions of the revenue regulation that withdraw or modify such grant are void. Basic
is the rule that administrative regulations cannot amend or revoke the law.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set
aside the August 29, 2002 Decision[2] and the August 11, 2003 Resolution[3] of the Court of
Appeals (CA) in CA-GR SP No. 67439. The assailed Decision reads as follows:

WHEREFORE, premises considered, the Resolution appealed from

is AFFIRMED in toto. No costs.[4]

The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts

The CA narrated the antecedent facts as follows:

Respondent is a domestic corporation primarily engaged in retailing of medicines

and other pharmaceutical products. In 1996, it operated six (6) drugstores under
the business name and style Mercury Drug.

1
From January to December 1996, respondent granted twenty (20%) percent sales
discount to qualified senior citizens on their purchases of medicines pursuant to
Republic Act No. [R.A.] 7432 and its Implementing Rules and Regulations. For the
said period, the amount allegedly representing the 20% sales discount granted by
respondent to qualified senior citizens totaled P904,769.00.

On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year
1996 declaring therein that it incurred net losses from its operations.

On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit
in the amount of P904,769.00 allegedly arising from the 20% sales discount
granted by respondent to qualified senior citizens in compliance with [R.A.] 7432.
Unable to obtain affirmative response from petitioner, respondent elevated its
claim to the Court of Tax Appeals [(CTA or Tax Court)] via a Petition for Review.

On February 12, 2001, the Tax Court rendered a Decision[5] dismissing

respondents Petition for lack of merit. In said decision, the [CTA] justified its ruling
with the following ratiocination:

x x x, if no tax has been paid to the government, erroneously or

illegally, or if no amount is due and collectible from the taxpayer,
tax refund or tax credit is unavailing. Moreover, whether the
recovery of the tax is made by means of a claim for refund or tax
credit, before recovery is allowed[,] it must be first established that
there was an actual collection and receipt by the government of
the tax sought to be recovered. x x x.
xxxxxxxxx

Prescinding from the above, it could logically be deduced that tax

credit is premised on the existence of tax liability on the part of
taxpayer. In other words, if there is no tax liability, tax credit is not
available.

Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed

resolution,[6] granted respondents motion for reconsideration and ordered herein
petitioner to issue a Tax Credit Certificate in favor of respondent citing the
decision of the then Special Fourth Division of [the CA] in CA G.R. SP No. 60057
entitled Central [Luzon] Drug Corporation vs. Commissioner of Internal
Revenue promulgated on May 31, 2001, to wit:

However, Sec. 229 clearly does not apply in the instant case
because the tax sought to be refunded or credited by petitioner
was not erroneously paid or illegally collected. We take exception
to the CTAs sweeping but unfounded statement that both tax
refund and tax credit are modes of recovering taxes which are
either erroneously or illegally paid to the government. Tax refunds
or credits do not exclusively pertain to illegally collected or
erroneously paid taxes as they may be other circumstances where
a refund is warranted. The tax refund provided under Section 229

2
 deals exclusively with illegally collected or erroneously paid taxes
but there are other possible situations, such as the refund of excess
estimated corporate quarterly income tax paid, or that of excess
input tax paid by a VAT-registered person, or that of excise tax paid
on goods locally produced or manufactured but actually exported.
The standards and mechanics for the grant of a refund or credit
under these situations are different from that under Sec. 229. Sec.
4[.a)] of R.A. 7432, is yet another instance of a tax credit and it does
not in any way refer to illegally collected or erroneously paid taxes,
x x x.[7]

Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to
issue a tax credit certificate in favor of respondent in the reduced amount of P903,038.39. It
reasoned that Republic Act No. (RA) 7432 required neither a tax liability nor a payment of taxes
by private establishments prior to the availment of a tax credit. Moreover, such credit is not
tantamount to an unintended benefit from the law, but rather a just compensation for the taking
of private property for public use.

Hence this Petition.[8]

The Issues

Petitioner raises the following issues for our consideration:

Whether the Court of Appeals erred in holding that respondent may claim the 20%
sales discount as a tax credit instead of as a deduction from gross income or gross
sales.

Whether the Court of Appeals erred in holding that respondent is entitled to a

refund.[9]

These two issues may be summed up in only one: whether respondent, despite incurring a net
loss, may still claim the 20 percent sales discount as a tax credit.

The Courts Ruling

The Petition is not meritorious.

3
 Sole Issue:
Claim of 20 Percent Sales Discount
as Tax Credit Despite Net Loss

Section 4a) of RA 7432[10] grants to senior citizens the privilege of obtaining a 20 percent discount
on their purchase of medicine from any private establishment in the country.[11] The latter may
then claim the cost of the discount as a tax credit.[12] But can such credit be claimed, even though
an establishment operates at a loss?

We answer in the affirmative.

Tax Credit versus

Tax Deduction

Although the term is not specifically defined in our Tax Code,[13] tax credit generally refers to an
amount that is subtracted directly from ones total tax liability.[14] It is an allowance against the
tax itself[15] or a deduction from what is owed[16] by a taxpayer to the government. Examples
of tax credits are withheld taxes, payments of estimated tax, and investment tax credits.[17]

Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -
- defined as a subtraction from income for tax purposes,[18] or an amount that is allowed by law
to reduce income prior to [the] application of the tax rate to compute the amount of tax which
is due.[19] An example of a tax deduction is any of the allowable deductions enumerated in
Section 34[20] of the Tax Code.

A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due,
including -- whenever applicable -- the income tax that is determined after applying the
corresponding tax rates to taxable income.[21] A tax deduction, on the other, reduces the income
that is subject to tax[22] in order to arrive at taxable income.[23] To think of the former as the latter
is to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been
computed; a tax deduction, before.

Tax Liability Required

for Tax Credit

Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax
liability before the tax credit can be applied. Without that liability, any tax credit application will
be useless. There will be no reason for deducting the latter when there is, to begin with, no
existing obligation to the government. However, as will be presented shortly, the existence of a
tax credit or its grant by law is not the same as the availment or use of such credit. While the
grant is mandatory, the availment or use is not.

If a net loss is reported by, and no other taxes are currently due from, a business establishment,
there will obviously be no tax liability against which any tax creditcan be applied.[24] For the
establishment to choose the immediate availment of a tax credit will be premature and
impracticable. Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has
granted without conditions a tax credit benefit to all covered establishments.

4
Although this tax credit benefit is available, it need not be used by losing ventures, since there is
no tax liability that calls for its application. Neither can it be reduced to nil by the quick yet callow
stroke of an administrative pen, simply because no reduction of taxes can instantly be effected.
By its nature, the tax creditmay still be deducted from a future, not a present, tax liability, without
which it does not have any use. In the meantime, it need not move. But it breathes.

Prior Tax Payments Not

Required for Tax Credit

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are
not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a
prior tax payment is needed. The Tax Code is in fact replete with provisions granting or
allowing tax credits, even though no taxes have been previously paid.

For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to
certain limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is a
similar provision for donors taxes -- again when paid to a foreign country -- in computing for
the donors tax due. The tax credits in both instances allude to the prior payment of taxes, even if
not made to our government.

Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions --
whether or not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of
any input tax not directly attributable to either activity. This input tax may either be the VAT on
the purchase or importation of goods or services that is merely due from -- not necessarily paid
by -- such VAT-registered person in the course of trade or business; or the transitional input tax
determined in accordance with Section 111(A). The latter type may in fact be an amount
equivalent to only eight percent of the value of a VAT-registered persons beginning inventory of
goods, materials and supplies, when such amount -- as computed -- is higher than the actual VAT
paid on the said items.[25]Clearly from this provision, the tax credit refers to an input tax that is
either due only or given a value by mere comparison with the VAT actually paid -- then later
prorated. No tax is actually paid prior to the availment of such credit.

In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed.
For the purchase of primary agricultural products used as inputs -- either in the processing of
sardines, mackerel and milk, or in the manufacture of refined sugar and cooking oil -- and for the
contract price of public work contracts entered into with the government, again, no prior tax
payments are needed for the use of the tax credit.

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated
may, under Section 112(A), apply for the issuance of a tax creditcertificate for the amount of
creditable input taxes merely due -- again not necessarily paid to -- the government and
attributable to such sales, to the extent that the input taxes have not been applied against output
taxes.[26] Where a taxpayer
is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the
amount of creditable input taxes due that are not directly and entirely attributable to any one of
these transactions shall be proportionately allocated on the basis of the volume of sales. Indeed,
in availing of such tax credit for VAT purposes, this provision -- as well as the one earlier
mentioned -- shows that the prior payment of taxes is not a requisite.

5
It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax
credit allowed, even though no prior tax payments are not required. Specifically, in this provision,
the imposition of a final withholding tax rate on cash and/or property dividends received by a
nonresident foreign corporation from a domestic corporation is subjected to the condition that
a foreign tax credit will be given by the domiciliary country in an amount equivalent to taxes that
are merely deemed paid.[27] Although true, this provision actually refers to the tax credit as
a condition only for the imposition of a lower tax rate, not as a deductionfrom the corresponding
tax liability. Besides, it is not our government but the domiciliary country that credits against the
income tax payable to the latter by the foreign corporation, the tax to be foregone or spared.[28]

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits,

against the income tax imposable under Title II, the amount of income taxes merely incurred --
not necessarily paid -- by a domestic corporation during a taxable year in any foreign country.
Moreover, Section 34(C)(5) provides that for such taxes incurred but not paid, a tax credit may
be allowed, subject to the condition precedent that the taxpayer shall simply give a bond with
sureties satisfactory to and approved by petitioner, in such sum as may be required; and further
conditioned upon payment by the taxpayer of any tax found due, upon petitioners
redetermination of it.

In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special
laws that grant or allow tax credits, even though no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to avoid double
taxation, income that is taxed in the state of source is also taxable in the state of residence, but
the tax paid in the former is merely allowed as a credit against the tax levied in the
latter.[29] Apparently, payment is made to the state of source, not thestate of residence. No tax,
therefore, has been previously paid to the latter.

Under special laws that particularly affect businesses, there can also be tax credit incentives. To
illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as
amended by Batas Pambansa Blg. (BP) 391, include tax credits equivalent to either five percent
of the net value earned, or five or ten percent of the net local content of exports. [30] In order to
avail of such credits under the said law and still achieve its objectives, no prior tax payments are
necessary.

From all the foregoing instances, it is evident that prior tax payments are not indispensable to
the availment of a tax credit. Thus, the CA correctly held that the availment under RA 7432 did
not require prior tax payments by private establishments concerned.[31] However, we do not
agree with its finding[32] that the carry-over of tax credits under the said special law to succeeding
taxable periods, and even their application against internal revenue taxes, did not necessitate
the existence of a tax liability.

The examples above show that a tax liability is certainly important in the availment or use, not
the existence or grant, of a tax credit. Regarding this matter, a private establishment reporting
a net loss in its financial statements is no different from another that presents a net income. Both
are entitled to the tax credit provided for under RA 7432, since the law itself accords that
unconditional benefit. However, for the losing establishment to immediately apply such credit,
where no tax is due, will be an improvident usance.

6
Sections 2.i and 4 of Revenue
Regulations No. 2-94 Erroneous

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts
they grant.[33] In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide
the procedures for its availment.[34] To deny such credit, despite the plain mandate of the law
and the regulations carrying out that mandate, is indefensible.

First, the definition given by petitioner is erroneous. It refers to tax credit as the amount
representing the 20 percent discount that shall be deducted by the said establishments from
their gross income for income tax purposes and from their gross sales for value-added tax or
other percentage tax purposes.[35] In ordinary business language, the tax credit represents the
amount of such discount. However, the manner by which the discount shall be credited against
taxes has not been clarified by the revenue regulations.

By ordinary acceptation, a discount is an abatement or reduction made from the gross amount
or value of anything.[36] To be more precise, it is in business parlance a deduction or lowering of
an amount of money;[37] or a reduction from the full amount or value of something, especially a
price.[38] In business there are many kinds of discount, the most common of which is that affecting
the income statement[39] or financial report upon which the income tax is based.

Business Discounts
Deducted from Gross Sales

A cash discount, for example, is one granted by business establishments to credit customers for
their prompt payment.[40] It is a reduction in price offered to the purchaser if payment is made
within a shorter period of time than the maximum time specified.[41] Also referred to as a sales
discount on the part of the seller and a purchase discount on the part of the buyer, it may be
expressed in such
terms as 5/10, n/30. [42]

A quantity discount, however, is a reduction in price allowed for purchases made in large
quantities, justified by savings in packaging, shipping, and handling.[43] It is also called
a volume or bulk discount.[44]

A percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by
wholesalers to retailers[45] is known as a trade discount. No entry for it need be made in the
manual or computerized books of accounts, since the purchase or sale is already valued at the
net price actually charged the buyer.[46] The purpose for the discount is to encourage trading or
increase sales, and the prices at which the purchased goods may be resold are also
suggested.[47] Even a chain discount -- a series of discounts from one list price -- is recorded at
net.[48]

Finally, akin to a trade discount is a functional discount. It is a suppliers price discount given to a
purchaser based on the [latters] role in the [formers] distribution system.[49] This role usually
involves warehousing or advertising.

Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally
accepted accounting principles (GAAP) in the country, this type of discount is reflected in

7
the income statement[50] as a line item deducted -- along with returns, allowances, rebates and
other similar expenses -- from gross sales to arrive at net sales.[51] This type of presentation is
resorted to, because the accounts receivable and sales figures that arise from sales discounts, --
as well as from quantity, volume or bulk discounts -- are recorded in the manual and
computerized books of accounts and reflected in the financial statements at the gross amounts
of the invoices.[52] This manner of recording credit sales -- known as the gross method -- is most
widely used, because it is simple, more convenient to apply than the net method, and produces
no material errors over time.[53]

However, under the net method used in recording trade, chain or functional discounts, only the
net amounts of the invoices -- after the discounts have been deducted -- are recorded in
the books of accounts[54] and reflected in the financial statements. A separate line item cannot
be shown,[55] because the transactions themselves involving both accounts
receivable and sales have already been entered into, net of the said discounts.

The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to
amounts whose sum -- along with sales returns, allowances and cost of goods sold[56] -- is
deducted from gross sales to come up with the gross income, profit or margin[57] derived from
business.[58] In another provision therein, sales discounts that are granted and indicated in the
invoices at the time of sale -- and that do not depend upon the happening of any future event --
may be excluded from the gross sales within the same quarter they were given.[59] While
determinative only of the VAT, the latter provision also appears as a suitable reference point for
income tax purposes already embraced in the former. After all, these two provisions affirm
that sales discounts are amounts that are always deductible from gross sales.

Reason for the Senior Citizen Discount:

The Law, Not Prompt Payment

A distinguishing feature of the implementing rules of RA 7432 is the private establishments

outright deduction of the discount from the invoice price of the medicine sold to the senior
citizen.[60] It is, therefore, expected that for each retail sale made under this law, the discount
period lasts no more than a day, because such discount is given -- and the net amount thereof
collected -- immediately upon perfection of the sale.[61] Although prompt payment is made for
an arms-length transaction by the senior citizen, the real and compelling reason for the private
establishment giving the discount is that the law itself makes it mandatory.

What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any
of the above discounts in particular. Prompt payment is not the reason for (although a necessary
consequence of) such grant. To be sure, the privilege enjoyed by the senior citizen must be
equivalent to the tax credit benefit enjoyed by the private establishment granting the discount.
Yet, under the revenue regulations promulgated by our tax authorities, this benefit has been
erroneously likened and confined to a sales discount.

To a senior citizen, the monetary effect of the privilege may be the same as that resulting from
a sales discount. However, to a private establishment, the effect is different from a simple
reduction in price that results from such discount. In other words, the tax credit benefit is not the
same as a sales discount. To repeat from our earlier discourse, this benefit cannot and should not
be treated as a tax deduction.

8
To stress, the effect of a sales discount on the income statement and income tax return of an
establishment covered by RA 7432 is different from that resulting from theavailment or use of
its tax credit benefit. While the former is a deduction before, the latter is a deduction after,
the income tax is computed. As mentioned earlier, a discount is not necessarily a sales discount,
and a tax credit for a simple discount privilege should not be automatically treated like a sales
discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not
distinguish, we ought not to distinguish.

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent
discount deductible from gross income for income tax purposes, or fromgross sales for VAT or
other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales
discount. This contrived definition is improper, considering that the latter has to be deducted
from gross sales in order to compute the gross income in the income statement and cannot be
deducted again, even for purposes of computing the income tax.

When the law says that the cost of the discount may be claimed as a tax credit, it means that the
amount -- when claimed -- shall be treated as a reduction from any tax liability, plain and simple.
The option to avail of the tax credit benefit depends upon the existence of a tax liability, but to
limit the benefit to a sales discount-- which is not even identical to the discount privilege that is
granted by law -- does not define it at all and serves no useful purpose. The definition must,
therefore, be stricken down.

Laws Not Amended

by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a regulation that operates to
create a rule out of harmony with
the statute is a mere nullity;[62] it cannot prevail.

It is a cardinal rule that courts will and should respect the contemporaneous construction placed
upon a statute by the executive officers whose duty it is to enforce it x x x.[63] In the scheme of
judicial tax administration, the need for certainty and predictability in the implementation of tax
laws is crucial.[64] Our tax authorities fill in the details that Congress may not have the opportunity
or competence to provide.[65] The regulations these authorities issue are relied upon by
taxpayers, who are certain that these will be followed by the courts.[66] Courts, however, will not
uphold these authorities interpretations when clearly absurd, erroneous or improper.

In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR
2-94 a meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled
up the intent of Congress in granting a mere discount privilege, not a sales discount. The
administrative agency issuing these regulations may not enlarge, alter or restrict the provisions
of the law it administers; it cannot engraft additional requirements not contemplated by the
legislature.[67]

In case of conflict, the law must prevail.[68] A regulation adopted pursuant to law is
law.[69] Conversely, a regulation or any portion thereof not adopted pursuant to law is no law and
has neither the force nor the effect of law.[70]

Availment of Tax

9
Credit Voluntary

Third, the word may in the text of the statute[71] implies that the
availability of the tax credit benefit is neither unrestricted nor mandatory.[72] There is no absolute
right conferred upon respondent, or any similar taxpayer, to avail itself of the tax credit remedy
whenever it chooses; neither does it impose a duty on the part of the government to sit back and
allow an important facet of tax collection to be at the sole control and discretion of the
taxpayer.[73] For the tax authorities to compel respondent to deduct the 20 percent discount from
either its gross income or its gross sales[74] is, therefore, not only to make an imposition without
basis in law, but also to blatantly contravene the law itself.

What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not
imperative. Respondent is given two options -- either to claim or not to claim the cost of the
discounts as a tax credit. In fact, it may even ignore the credit and simply consider the gesture as
an act of beneficence, an expression of its social conscience.

Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax
credit can easily be applied. If there is none, the credit cannot be used and will just have to be
carried over and revalidated[75] accordingly. If, however, the business continues to operate at a
loss and no other taxes are due, thus compelling it to close shop, the credit can never be applied
and will be lost altogether.

In other words, it is the existence or the lack of a tax liability that determines whether the cost
of the discounts can be used as a tax credit. RA 7432 does not give respondent the unfettered
right to avail itself of the credit whenever it pleases. Neither does it allow our tax administrators
to expand or contract the legislative mandate. The plain meaning rule or verba legis in statutory
construction is thus applicable x x x. Where the words of a statute are clear, plain and free from
ambiguity, it must be given its literal meaning and applied without attempted interpretation. [76]

Tax Credit Benefit

Deemed Just Compensation

Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent
domain. Be it stressed that the privilege enjoyed by senior citizens does not come directly from
the State, but rather from the private establishments concerned. Accordingly, the tax
credit benefit granted to these establishments can be deemed as their just compensation for
private property taken by the State for public use.[77]

The concept of public use is no longer confined to the traditional notion of use by the public, but
held synonymous with public interest, public benefit, public welfare, andpublic
convenience.[78] The discount privilege to which our senior citizens are entitled is actually a
benefit enjoyed by the general public to which these citizens belong. The discounts given would
have entered the coffers and formed part of the gross sales of the private establishments
concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced
subsidy corresponding to the taking of private property for public use or benefit.

10
As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just
compensation. This term refers not only to the issuance of a tax credit certificate indicating the
correct amount of the discounts given, but also to the promptness in its release. Equivalent to
the payment of property taken by the State, such issuance -- when not done within a reasonable
time from the grant of the discounts -- cannot be considered as just compensation. In effect,
respondent is made to suffer the consequences of being immediately deprived of its revenues
while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope
with the reduction in its revenues.[79]

Besides, the taxation power can also be used as an implement for the exercise of the power of
eminent domain.[80] Tax measures are but enforced contributions exacted on pain of penal
sanctions[81] and clearly imposed for a public purpose.[82] In recent years, the power to tax has
indeed become a most effective tool to realize social justice, public welfare, and the equitable
distribution of wealth.[83]

While it is a declared commitment under Section 1 of RA 7432, social justice cannot be invoked
to trample on the rights of property owners who under our Constitution and laws are also entitled
to protection. The social justice consecrated in our [C]onstitution [is] not intended to take away
rights from a person and give them to another who is not entitled thereto.[84] For this reason, a
just compensation for income that is taken away from respondent becomes necessary. It is in
the tax credit that our legislators find support to realize social justice, and no administrative body
can alter that fact.

To put it differently, a private establishment that merely breaks even [85] -- without the discounts
yet -- will surely start to incur losses because of such discounts. The same effect is expected if its
mark-up is less than 20 percent, and if all its sales come from retail purchases by senior citizens.
Aside from the observation we have already raised earlier, it will also be grossly unfair to an
establishment if the discounts will be treated merely as deductions from either its gross
income or itsgross sales. Operating at a loss through no fault of its own, it will realize that the tax
credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will
be put in a better position if they avail themselves of tax credits denied those that are losing,
because no taxes are due from the latter.

Grant of Tax Credit

Intended by the Legislature

Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the
community as a whole and to establish a program beneficial to them.[86]These objectives are
consonant with the constitutional policy of making health x x x services available to all the people
at affordable cost[87] and of giving priority for the needs of the x x x elderly.[88] Sections 2.i and 4
of RR 2-94, however, contradict these constitutional policies and statutory objectives.

Furthermore, Congress has allowed all private establishments a simple tax credit, not a
deduction. In fact, no cash outlay is required from the government for theavailment or use of
such credit. The deliberations on February 5, 1992 of the Bicameral Conference Committee
Meeting on Social Justice, which finalized RA 7432, disclose the true intent of our legislators to
treat the sales discounts as a tax credit, rather than as a deduction from gross income. We quote
from those deliberations as follows:

11
"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from
taxable income. I think we incorporated there a provision
na - on the responsibility of the private hospitals and
drugstores, hindi ba?
SEN. ANGARA. Oo.
THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here
about the deductions from taxable income of that private
hospitals, di ba ganon 'yan?
MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government
and public institutions, so, puwede na po nating hindi isama
yung mga less deductions ng taxable income.
THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung
isiningit natin?
MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the
microphone).
SEN. ANGARA. Hindi pa, hindi pa.
THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?
SEN. ANGARA. Oo. You want to insert that?
THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.
SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount,
provided that, the private hospitals can claim the expense
as a tax credit.
REP. AQUINO. Yah could be allowed as deductions in the perpetrations of
(inaudible) income.
SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?
REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments
na covered.
THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.
REP. AQUINO. Ano ba yung establishments na covered?
SEN. ANGARA. Restaurant lodging houses, recreation centers.
REP. AQUINO. All establishments covered siguro?
SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon.
Can we go back to Section 4 ha?
REP. AQUINO. Oho.
SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20%
discount from all establishments et cetera, et cetera,
provided that said establishments - provided that private
establishments may claim the cost as a tax credit. Ganon ba
'yon?
REP. AQUINO. Yah.
SEN. ANGARA. Dahil kung government, they don't need to claim it.
THE CHAIRMAN. (Rep. Unico). Tax credit.
SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.
REP. AQUINO Okay.
SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".[89]

12
Special Law
Over General Law

Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law. x x
x [T]he rule is that on a specific matter the special law shall prevail over the general law, which
shall
be resorted to only to supply deficiencies in the former.[90] In addition, [w]here there are two
statutes, the earlier special and the later general -- the terms of the general broad enough to
include the matter provided for in the special -- the fact that one is special and the other is general
creates a presumption that the special is to be considered as remaining an exception to the
general,[91] one as a general law of the land, the other as the law of a particular case.[92] It is a
canon of statutory construction that a later statute, general in its terms and not expressly
repealing a prior special statute, will ordinarily not affect the special provisions of such earlier
statute.[93]

RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the
Tax Code -- a later law. When the former states that a tax creditmay be claimed, then the
requirement of prior tax payments under certain provisions of the latter, as discussed above,
cannot be made to apply. Neither can the instances of or references to a tax deduction under the
Tax Code[94] be made to restrict RA 7432. No provision of any revenue regulation can supplant or
modify the acts of Congress.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court of
Appeals AFFIRMED. No pronouncement as to costs.

SO ORDERED.

13
 EN BANC

CARLOS SUPERDRUG CORP., G.R. No. 166494

doing business under the name
and style Carlos Superdrug, Present:
ELSIE M. CANO, doing business
under the name and style Advance PUNO, C.J.,
Drug, Dr. SIMPLICIO L. YAP, JR., QUISUMBING,*
doing business under the name and YNARES-SANTIAGO,
style City Pharmacy, MELVIN S. SANDOVAL-GUTIERREZ,**
DELA SERNA, doing business under CARPIO,
the name and style Botica dela Serna, AUSTRIA-MARTINEZ,
and LEYTE SERV-WELL CORP., CORONA,
doing business under the name and CARPIO MORALES,
style Leyte Serv-Well Drugstore, AZCUNA,
Petitioners, TINGA,
CHICO-NAZARIO,
- versus - GARCIA,
VELASCO, JR., and
DEPARTMENT OF SOCIAL NACHURA, JJ.
WELFARE and DEVELOPMENT
(DSWD), DEPARTMENT OF Promulgated:
HEALTH (DOH), DEPARTMENT
OF FINANCE (DOF), DEPARTMENT June 29, 2007
OF JUSTICE (DOJ), and
DEPARTMENT OF INTERIOR and
LOCAL GOVERNMENT (DILG),
Respondents.
x ---------------------------------------------------------------------------------------- x

DECISION

AZCUNA, J.:
This is a petition[1] for Prohibition with Prayer for Preliminary Injunction assailing the
constitutionality of Section 4(a) of Republic Act (R.A.) No. 9257, [2] otherwise known as the
Expanded Senior Citizens Act of 2003.

Petitioners are domestic corporations and proprietors operating drugstores in

the Philippines.

Public respondents, on the other hand, include the Department of Social Welfare and
Development (DSWD), the Department of Health (DOH), the Department of Finance (DOF), the
Department of Justice (DOJ), and the Department of Interior and Local Government (DILG) which
have been specifically tasked to monitor the drugstorescompliance with the law; promulgate the
implementing rules and regulations for the effective implementation of the law; and prosecute
and revoke the licenses of erring drugstore establishments.

The antecedents are as follows:

14
 On February 26, 2004, R.A. No. 9257, amending R.A. No. 7432,[3] was signed into law by
President Gloria Macapagal-Arroyo and it became effective on March 21, 2004. Section 4(a) of
the Act states:

SEC. 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the
following:

(a) the grant of twenty percent (20%) discount from all establishments
relative to the utilization of services in hotels and similar lodging establishments,
restaurants and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens, including
funeral and burial services for the death of senior citizens;

...

The establishment may claim the discounts granted under (a), (f), (g) and
(h) as tax deduction based on the net cost of the goods sold or services
rendered: Provided, That the cost of the discount shall be allowed as deduction
from gross income for the same taxable year that the discount is
granted. Provided, further, That the total amount of the claimed tax deduction net
of value added tax if applicable, shall be included in their gross sales receipts for
tax purposes and shall be subject to proper documentation and to the provisions
of the National Internal Revenue Code, as amended.[4]

On May 28, 2004, the DSWD approved and adopted the Implementing Rules and
Regulations of R.A. No. 9257, Rule VI, Article 8 of which states:

Article 8. Tax Deduction of Establishments. The establishment may claim

the discounts granted under Rule V, Section 4 Discounts for
[5]
Establishments; Section 9, Medical and Dental Services in Private
Facilities[,][6] and Sections 10[7] and 11[8] Air, Sea and Land Transportation as tax
deduction based on the net cost of the goods sold or services rendered. Provided,
That the cost of the discount shall be allowed as deduction from gross income for
the same taxable year that the discount is granted; Provided, further, That the
total amount of the claimed tax deduction net of value added tax if applicable,
shall be included in their gross sales receipts for tax purposes and shall be
subject to proper documentation and to the provisions of the National Internal
Revenue Code, as amended; Provided, finally, that the implementation of the tax
deduction shall be subject to the Revenue Regulations to be issued by the Bureau
of Internal Revenue (BIR) and approved by the Department of Finance (DOF). [9]
On July 10, 2004, in reference to the query of the Drug Stores Association of the
Philippines (DSAP) concerning the meaning of a tax deduction under the Expanded Senior
Citizens Act, the DOF, through Director IV Ma. Lourdes B. Recente, clarified as follows:

1) The difference between the Tax Credit (under the Old Senior Citizens
Act) and Tax Deduction (under the Expanded Senior Citizens Act).

1.1. The provision of Section 4 of R.A. No. 7432 (the old Senior
Citizens Act) grants twenty percent (20%) discount from all establishments
relative to the utilization of transportation services, hotels and similar
lodging establishment, restaurants and recreation centers and purchase of
medicines anywhere in the country, the costs of which may be claimed by
the private establishments concerned as tax credit.

15
 Effectively, a tax credit is a peso-for-peso deduction from a
taxpayers tax liability due to the government of the amount of discounts
such establishment has granted to a senior citizen. The establishment
recovers the full amount of discount given to a senior citizen and hence,
the government shoulders 100% of the discounts granted.

It must be noted, however, that conceptually, a tax credit scheme

under the Philippine tax system, necessitates that prior payments of taxes
have been made and the taxpayer is attempting to recover this tax
payment from his/her income tax due. The tax credit scheme under R.A.
No. 7432 is, therefore, inapplicable since no tax payments have previously
occurred.

1.2. The provision under R.A. No. 9257, on the other hand,
provides that the establishment concerned may claim the discounts under
Section 4(a), (f), (g) and (h) as tax deduction from gross income, based on
the net cost of goods sold or services rendered.

Under this scheme, the establishment concerned is allowed to

deduct from gross income, in computing for its tax liability, the amount of
discounts granted to senior citizens. Effectively, the government loses in
terms of foregone revenues an amount equivalent to the marginal tax rate
the said establishment is liable to pay the government. This will be an
amount equivalent to 32% of the twenty percent (20%) discounts so
granted. The establishment shoulders the remaining portion of the
granted discounts.

It may be necessary to note that while the burden on [the]

government is slightly diminished in terms of its percentage share on the
discounts granted to senior citizens, the number of potential
establishments that may claim tax deductions, have however, been
broadened. Aside from the establishments that may claim tax
credits under the old law, more establishments were added under the new
law such as: establishments providing medical and dental services,
diagnostic and laboratory services, including professional fees of attending
doctors in all private hospitals and medical facilities, operators of domestic
air and sea transport services, public railways and skyways and bus
transport services.

A simple illustration might help amplify the points discussed above,

as follows:

Tax Deduction Tax Credit

Gross Sales x x x x x x x x x x x x
Less : Cost of goods sold x x x x x x x x x x
Net Sales x x x x x x x x x x x x
Less: Operating Expenses:
Tax Deduction on Discounts x x x x --
Other deductions: x x x x x x x x
Net Taxable Income x x x x x x x x x x
Tax Due x x x x x x
Less: Tax Credit -- ______x x
Net Tax Due -- x x

16
 As shown above, under a tax deduction scheme, the tax deduction on
discounts was subtracted from Net Sales together with other deductions which
are considered as operating expenses before the Tax Due was computed based on
the Net Taxable Income. On the other hand, under a tax credit scheme, the
amount of discounts which is the tax credit item, was deducted directly from the
tax due amount.[10]

Meanwhile, on October 1, 2004, Administrative Order (A.O.) No. 171 or the Policies and
Guidelines to Implement the Relevant Provisions of Republic Act 9257, otherwise known as the
Expanded Senior Citizens Act of 2003[11] was issued by the DOH, providing the grant of twenty
percent (20%) discount in the purchase of unbranded generic medicines from all establishments
dispensing medicines for the exclusive use of the senior citizens.
On November 12, 2004, the DOH issued Administrative Order No 177[12] amending A.O. No. 171.
Under A.O. No. 177, the twenty percent discount shall not be limited to the purchase of
unbranded generic medicines only, but shall extend to both prescription and non-prescription
medicines whether branded or generic. Thus, it stated that [t]he grant of twenty percent (20%)
discount shall be provided in the purchase of medicines from all establishments dispensing
medicines for the exclusive use of the senior citizens.

Petitioners assail the constitutionality of Section 4(a) of the Expanded Senior Citizens Act based
on the following grounds:[13]

1) The law is confiscatory because it infringes Art. III, Sec. 9 of the

Constitution which provides that private property shall not be taken for
public use without just compensation;

2) It violates the equal protection clause (Art. III, Sec. 1) enshrined in our
Constitution which states that no person shall be deprived of life, liberty
or property without due process of law, nor shall any person be denied of
the equal protection of the laws; and

3) The 20% discount on medicines violates the constitutional guarantee

in Article XIII, Section 11 that makes essential goods, health and other
social services available to all people at affordable cost.[14]

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes
deprivation of private property. Compelling drugstore owners and establishments to grant the
discount will result in a loss of profit

and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines;
and 2) the law failed to provide a scheme whereby drugstores will be justly compensated for the
discount.

Examining petitioners arguments, it is apparent that what petitioners are ultimately

questioning is the validity of the tax deduction scheme as a reimbursement mechanism for the
twenty percent (20%) discount that they extend to senior citizens.
Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully
reimburse petitioners for the discount privilege accorded to senior citizens. This is because the

17
discount is treated as a deduction, a tax-deductible expense that is subtracted from the gross
income and results in a lower taxable income. Stated otherwise, it is an amount that is allowed
by law[15] to reduce the income prior to the application of the tax rate to compute the amount of
tax which is due.[16] Being a tax deduction, the discount does not reduce taxes owed on a peso
for peso basis but merely offers a fractional reduction in taxes owed.

Theoretically, the treatment of the discount as a deduction reduces the net income of the
private establishments concerned. The discounts given would have entered the coffers and
formed part of the gross sales of the private establishments, were it not for R.A. No. 9257.

The permanent reduction in their total revenues is a forced subsidy corresponding to the
taking of private property for public use or benefit.[17] This constitutes compensable taking for
which petitioners would ordinarily become entitled to a just compensation.

Just compensation is defined as the full and fair equivalent of the property taken from its
owner by the expropriator. The measure is not the takers gain but the owners loss. The
word just is used to intensify the meaning of the word compensation, and to convey the idea
that the equivalent to be rendered for the property to be taken shall be real, substantial, full and
ample.[18]

A tax deduction does not offer full reimbursement of the senior citizen discount. As such,
it would not meet the definition of just compensation.[19]

Having said that, this raises the question of whether the State, in promoting the health
and welfare of a special group of citizens, can impose upon private establishments the burden of
partly subsidizing a government program.

The Court believes so.

The Senior Citizens Act was enacted primarily to maximize the contribution of senior
citizens to nation-building, and to grant benefits and privileges to them for their improvement
and well-being as the State considers them an integral part of our society.[20]

The priority given to senior citizens finds its basis in the Constitution as set forth in the
law itself. Thus, the Act provides:

SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:

SECTION 1. Declaration of Policies and Objectives. Pursuant to Article XV,

Section 4 of the Constitution, it is the duty of the family to take care of its elderly
members while the State may design programs of social security for them. In
addition to this, Section 10 in the Declaration of Principles and State Policies
provides: The State shall provide social justice in all phases of national
development. Further, Article XIII, Section 11, provides: The State shall adopt an
integrated and comprehensive approach to health development which shall
endeavor to make essential goods, health and other social services available to all
the people at affordable cost. There shall be priority for the needs of the

18
 underprivileged sick, elderly, disabled, women and children. Consonant with these
constitutional principles the following are the declared policies of this Act:

...

(f) To recognize the important role of the private sector in the

improvement of the welfare of senior citizens and to actively seek their
partnership.[21]

To implement the above policy, the law grants a twenty percent discount to senior citizens for
medical and dental services, and diagnostic and laboratory fees; admission fees charged by
theaters, concert halls, circuses, carnivals, and other similar places of culture, leisure and
amusement; fares for domestic land, air and sea travel; utilization of services in hotels and similar
lodging establishments, restaurants and recreation centers; and purchases of medicines for the
exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that
business establishments extending the twenty percent discount to senior citizens may claim the
discount as a tax deduction.

The law is a legitimate exercise of police power which, similar to the power of eminent domain,
has general welfare for its object. Police power is not capable of an exact definition, but has been
purposely veiled in general terms to underscore its comprehensiveness to meet all exigencies
and provide enough room for an efficient and flexible response to conditions and circumstances,
thus assuring the greatest benefits. [22] Accordingly, it has been described as the most essential,
insistent and the least limitable of powers, extending as it does to all the great public needs.[23] It
is [t]he power vested in the legislature by the constitution to make, ordain, and establish all
manner of wholesome and reasonable laws, statutes, and ordinances, either with penalties or
without, not repugnant to the constitution, as they shall judge to be for the good and welfare of
the commonwealth, and of the subjects of the same.[24]

For this reason, when the conditions so demand as determined by the legislature,
property rights must bow to the primacy of police power because property rights, though
sheltered by due process, must yield to general welfare.[25]

Police power as an attribute to promote the common good would be diluted considerably
if on the mere plea of petitioners that they will suffer loss of earnings and capital, the questioned
provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged
confiscatory effect of the provision in question, there is no basis for its nullification in view of the
presumption of validity which every law has in its favor.[26]

Given these, it is incorrect for petitioners to insist that the grant of the senior citizen
discount is unduly oppressive to their business, because petitioners have not taken time to
calculate correctly and come up with a financial report, so that they have not been able to show
properly whether or not the tax deduction scheme really works greatly to their disadvantage. [27]

In treating the discount as a tax deduction, petitioners insist that they will incur losses
because, referring to the DOF Opinion, for every P1.00 senior citizen discount that petitioners

19
would give, P0.68 will be shouldered by them as only P0.32 will be refunded by the government
by way of a tax deduction.

To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive
maintenance drug Norvasc as an example. According to the latter, it acquires Norvasc from the
distributors at P37.57 per tablet, and retails it at P39.60 (or at a margin of 5%). If it grants a 20%
discount to senior citizens or an amount equivalent to P7.92, then it would have to
sell Norvasc at P31.68 which translates to a loss from capital of P5.89 per tablet. Even if the
government will allow a tax deduction, only P2.53 per tablet will be refunded and not the full
amount of the discount which is P7.92. In short, only 32% of the 20% discount will be reimbursed
to the drugstores.[28]

Petitioners computation is flawed. For purposes of reimbursement, the law states that
the cost of the discount shall be deducted from gross income,[29] the amount of income
derived from all sources before deducting allowable expenses, which will result in net
income. Here, petitioners tried to show a loss on a per transaction basis, which should not be the
case. An income statement, showing an accounting of petitioners sales, expenses, and net profit
(or loss) for a given period could have accurately reflected the effect of the discount on their
income. Absent any financial statement, petitioners cannot substantiate their claim that they will
be operating at a loss should they give the discount. In addition, the computation was
erroneously based on the assumption that their customers consisted wholly of senior citizens.
Lastly, the 32% tax rate is to be imposed on income, not on the amount of the discount.

Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the
prices of their medicines given the cutthroat nature of the players in the industry. It is a business
decision on the part of petitioners to peg the mark-up at 5%. Selling the medicines below
acquisition cost, as alleged by petitioners, is merely a result of this decision. Inasmuch as pricing
is a property right, petitioners cannot reproach the law for being oppressive, simply because they
cannot afford to raise their prices for fear of losing their customers to competition.

The Court is not oblivious of the retail side of the pharmaceutical industry and the
competitive pricing component of the business. While the Constitution protects property rights,
petitioners must accept the realities of business and the State, in the exercise of police power,
can intervene in the operations of a business which may result in an impairment of property
rights in the process.

Moreover, the right to property has a social dimension. While Article XIII of the
Constitution provides the precept for the protection of property, various laws and jurisprudence,
particularly on agrarian reform and the regulation of contracts and public utilities, continuously
serve as a reminder that the right to property can be relinquished upon the command of the
State for the promotion of public good.[30]

Undeniably, the success of the senior citizens program rests largely on the support
imparted by petitioners and the other private establishments concerned. This being the case, the
means employed in invoking the active participation of the private sector, in order to achieve the
purpose or objective of the law, is reasonably and directly related. Without sufficient proof that
20
Section 4(a) of R.A. No. 9257 is arbitrary, and that the continued implementation of the same
would be unconscionably detrimental to petitioners, the Court will refrain from quashing a
legislative act.[31]
WHEREFORE, the petition is DISMISSED for lack of merit.

No costs.

SO ORDERED.

21
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 144104 June 29, 2004

LUNG CENTER OF THE PHILIPPINES, petitioner,

vs.
QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon
City,respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of the
Decision1 dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which affirmed the
decision of the Central Board of Assessment Appeals holding that the lot owned by the petitioner and its
hospital building constructed thereon are subject to assessment for purposes of real property tax.

The Antecedents

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on January
16, 1981 by virtue of Presidential Decree No. 1823.2 It is the registered owner of a parcel of land,
particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner
Elliptical Road, Central District, Quezon City. The lot has an area of 121,463 square meters and is
covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry of Deeds of Quezon City.
Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. A big
space at the ground floor is being leased to private parties, for canteen and small store spaces, and to
medical or professional practitioners who use the same as their private clinics for their patients whom
they charge for their professional services. Almost one-half of the entire area on the left side of the
building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner of
Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a private enterprise
known as the Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients,
both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual
subsidies from the government.

On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real
property taxes in the amount of P4,554,860 by the City Assessor of Quezon City.3 Accordingly, Tax
Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-A) were issued for the land and the
hospital building, respectively.4 On August 25, 1993, the petitioner filed a Claim for Exemption5 from real
property taxes with the City Assessor, predicated on its claim that it is a charitable institution. The
petitioner’s request was denied, and a petition was, thereafter, filed before the Local Board of
Assessment Appeals of Quezon City (QC-LBAA, for brevity) for the reversal of the resolution of the City
Assessor. The petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the
property is exempt from real property taxes. It averred that a minimum of 60% of its hospital beds are
exclusively used for charity patients and that the major thrust of its hospital operation is to serve charity
patients. The petitioner contends that it is a charitable institution and, as such, is exempt from real
property taxes. The QC-LBAA rendered judgment dismissing the petition and holding the petitioner
liable for real property taxes.6

The QC-LBAA’s decision was, likewise, affirmed on appeal by the Central Board of Assessment Appeals of
Quezon City (CBAA, for brevity)7 which ruled that the petitioner was not a charitable institution and that
its real properties were not actually, directly and exclusively used for charitable purposes; hence, it was
not entitled to real property tax exemption under the constitution and the law. The petitioner sought
relief from the Court of Appeals, which rendered judgment affirming the decision of the CBAA.8

22
Undaunted, the petitioner filed its petition in this Court contending that:

A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO REALTY TAX
EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF
ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED FOR CHARITABLE
PURPOSES.

B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER ITS CHARTER,
PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION.

The petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of the
1987 Constitution. It asserts that its character as a charitable institution is not altered by the fact that it
admits paying patients and renders medical services to them, leases portions of the land to private
parties, and rents out portions of the hospital to private medical practitioners from which it derives
income to be used for operational expenses. The petitioner points out that for the years 1995 to 1999,
100% of its out-patients were charity patients and of the hospital’s 282-bed capacity, 60% thereof, or
170 beds, is allotted to charity patients. It asserts that the fact that it receives subsidies from the
government attests to its character as a charitable institution. It contends that the "exclusivity" required
in the Constitution does not necessarily mean "solely." Hence, even if a portion of its real estate is
leased out to private individuals from whom it derives income, it does not lose its character as a
charitable institution, and its exemption from the payment of real estate taxes on its real property. The
petitioner cited our ruling in Herrera v. QC-BAA9 to bolster its pose. The petitioner further contends that
even if P.D. No. 1823 does not exempt it from the payment of real estate taxes, it is not precluded from
seeking tax exemption under the 1987 Constitution.

In their comment on the petition, the respondents aver that the petitioner is not a charitable entity. The
petitioner’s real property is not exempt from the payment of real estate taxes under P.D. No. 1823 and
even under the 1987 Constitution because it failed to prove that it is a charitable institution and that the
said property is actually, directly and exclusively used for charitable purposes. The respondents noted
that in a newspaper report, it appears that graft charges were filed with the Sandiganbayan against the
director of the petitioner, its administrative officer, and Zenaida Rivera, the proprietress of the Elliptical
Orchids and Garden Center, for entering into a lease contract over 7,663.13 square meters of the
property in 1990 for only P20,000 a month, when the monthly rental should be P357,000 a month as
determined by the Commission on Audit; and that instead of complying with the directive of the COA for
the cancellation of the contract for being grossly prejudicial to the government, the petitioner renewed
the same on March 13, 1995 for a monthly rental of only P24,000. They assert that the petitioner uses
the subsidies granted by the government for charity patients and uses the rest of its income from the
property for the benefit of paying patients, among other purposes. They aver that the petitioner failed
to adduce substantial evidence that 100% of its out-patients and 170 beds in the hospital are reserved
for indigent patients. The respondents further assert, thus:

13. That the claims/allegations of the Petitioner LCP do not speak well of its record of service.
That before a patient is admitted for treatment in the Center, first impression is that it is pay-
patient and required to pay a certain amount as deposit. That even if a patient is living below
the poverty line, he is charged with high hospital bills. And, without these bills being first settled,
the poor patient cannot be allowed to leave the hospital or be discharged without first paying
the hospital bills or issue a promissory note guaranteed and indorsed by an influential agency or
person known only to the Center; that even the remains of deceased poor patients suffered the
same fate. Moreover, before a patient is admitted for treatment as free or charity patient, one
must undergo a series of interviews and must submit all the requirements needed by the
Center, usually accompanied by endorsement by an influential agency or person known only to
the Center. These facts were heard and admitted by the Petitioner LCP during the hearings
before the Honorable QC-BAA and Honorable CBAA. These are the reasons of indigent patients,
instead of seeking treatment with the Center, they prefer to be treated at the Quezon Institute.
Can such practice by the Center be called charitable?10

The Issues

The issues for resolution are the following: (a) whether the petitioner is a charitable institution within
the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of

23
Republic Act No. 7160; and (b) whether the real properties of the petitioner are exempt from real
property taxes.

The Court’s Ruling

The petition is partially granted.

On the first issue, we hold that the petitioner is a charitable institution within the context of the 1973
and 1987 Constitutions. To determine whether an enterprise is a charitable institution/entity or not, the
elements which should be considered include the statute creating the enterprise, its corporate
purposes, its constitution and by-laws, the methods of administration, the nature of the actual work
performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use
and occupation of the properties.11

In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws,
for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life or otherwise
lessening the burden of government.12 It may be applied to almost anything that tend to promote the
well-doing and well-being of social man. It embraces the improvement and promotion of the happiness
of man.13 The word "charitable" is not restricted to relief of the poor or sick.14 The test of a charity and a
charitable organization are in law the same. The test whether an enterprise is charitable or not is
whether it exists to carry out a purpose reorganized in law as charitable or whether it is maintained for
gain, profit, or private advantage.

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the
provisions of the decree, is to be administered by the Office of the President of the Philippines with the
Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and benefit
of the Filipino people principally to help combat the high incidence of lung and pulmonary diseases in
the Philippines. The raison d’etre for the creation of the petitioner is stated in the decree, viz:

Whereas, for decades, respiratory diseases have been a priority concern, having been the
leading cause of illness and death in the Philippines, comprising more than 45% of the total
annual deaths from all causes, thus, exacting a tremendous toll on human resources, which
ailments are likely to increase and degenerate into serious lung diseases on account of unabated
pollution, industrialization and unchecked cigarette smoking in the country;lavvph!l.net

Whereas, the more common lung diseases are, to a great extent, preventable, and curable with
early and adequate medical care, immunization and through prompt and intensive prevention
and health education programs;

Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies and
efforts at preventing, treating and rehabilitating people affected by lung diseases, and to
undertake research and training on the cure and prevention of lung diseases, through a Lung
Center which will house and nurture the above and related activities and provide tertiary-level
care for more difficult and problematical cases;

Whereas, to achieve this purpose, the Government intends to provide material and financial
support towards the establishment and maintenance of a Lung Center for the welfare and
benefit of the Filipino people.15

The purposes for which the petitioner was created are spelled out in its Articles of Incorporation, thus:

SECOND: That the purposes for which such corporation is formed are as follows:

1. To construct, establish, equip, maintain, administer and conduct an integrated

medical institution which shall specialize in the treatment, care, rehabilitation and/or
relief of lung and allied diseases in line with the concern of the government to assist and
provide material and financial support in the establishment and maintenance of a lung
center primarily to benefit the people of the Philippines and in pursuance of the policy
of the State to secure the well-being of the people by providing them specialized health

24
and medical services and by minimizing the incidence of lung diseases in the country
and elsewhere.

2. To promote the noble undertaking of scientific research related to the prevention of

lung or pulmonary ailments and the care of lung patients, including the holding of a
series of relevant congresses, conventions, seminars and conferences;

3. To stimulate and, whenever possible, underwrite scientific researches on the

biological, demographic, social, economic, eugenic and physiological aspects of lung or
pulmonary diseases and their control; and to collect and publish the findings of such
research for public consumption;

4. To facilitate the dissemination of ideas and public acceptance of information on lung

consciousness or awareness, and the development of fact-finding, information and
reporting facilities for and in aid of the general purposes or objects aforesaid, especially
in human lung requirements, general health and physical fitness, and other relevant or
related fields;

5. To encourage the training of physicians, nurses, health officers, social workers and
medical and technical personnel in the practical and scientific implementation of
services to lung patients;

6. To assist universities and research institutions in their studies about lung diseases, to
encourage advanced training in matters of the lung and related fields and to support
educational programs of value to general health;

7. To encourage the formation of other organizations on the national, provincial and/or

city and local levels; and to coordinate their various efforts and activities for the
purpose of achieving a more effective programmatic approach on the common
problems relative to the objectives enumerated herein;

8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may be given to
the organization;

9. To extend, whenever possible and expedient, medical services to the public and, in
general, to promote and protect the health of the masses of our people, which has long
been recognized as an economic asset and a social blessing;

10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies
of the people in any and all walks of life, including those who are poor and needy, all
without regard to or discrimination, because of race, creed, color or political belief of
the persons helped; and to enable them to obtain treatment when such disorders occur;

11. To participate, as circumstances may warrant, in any activity designed and carried on
to promote the general health of the community;

12. To acquire and/or borrow funds and to own all funds or equipment, educational
materials and supplies by purchase, donation, or otherwise and to dispose of and
distribute the same in such manner, and, on such basis as the Center shall, from time to
time, deem proper and best, under the particular circumstances, to serve its general and
non-profit purposes and objectives;lavvphil.net

13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of
properties, whether real or personal, for purposes herein mentioned; and

14. To do everything necessary, proper, advisable or convenient for the accomplishment

of any of the powers herein set forth and to do every other act and thing incidental
thereto or connected therewith.16

25
Hence, the medical services of the petitioner are to be rendered to the public in general in any and all
walks of life including those who are poor and the needy without discrimination. After all, any person,
the rich as well as the poor, may fall sick or be injured or wounded and become a subject of charity.17

As a general principle, a charitable institution does not lose its character as such and its exemption from
taxes simply because it derives income from paying patients, whether out-patient, or confined in the
hospital, or receives subsidies from the government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution.18 In Congregational Sunday School, etc. v.
Board of Review,19 the State Supreme Court of Illinois held, thus:

… [A]n institution does not lose its charitable character, and consequent exemption from
taxation, by reason of the fact that those recipients of its benefits who are able to pay are
required to do so, where no profit is made by the institution and the amounts so received are
applied in furthering its charitable purposes, and those benefits are refused to none on account
of inability to pay therefor. The fundamental ground upon which all exemptions in favor of
charitable institutions are based is the benefit conferred upon the public by them, and a
consequent relief, to some extent, of the burden upon the state to care for and advance the
interests of its citizens.20

As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of South
Dakota v. Baker:21

… [T]he fact that paying patients are taken, the profits derived from attendance upon these
patients being exclusively devoted to the maintenance of the charity, seems rather to enhance
the usefulness of the institution to the poor; for it is a matter of common observation amongst
those who have gone about at all amongst the suffering classes, that the deserving poor can
with difficulty be persuaded to enter an asylum of any kind confined to the reception of objects
of charity; and that their honest pride is much less wounded by being placed in an institution in
which paying patients are also received. The fact of receiving money from some of the patients
does not, we think, at all impair the character of the charity, so long as the money thus received
is devoted altogether to the charitable object which the institution is intended to further.22

The money received by the petitioner becomes a part of the trust fund and must be devoted to public
trust purposes and cannot be diverted to private profit or benefit.23

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its
character as a charitable institution simply because the gift or donation is in the form of subsidies
granted by the government. As held by the State Supreme Court of Utah in Yorgason v. County Board of
Equalization of Salt Lake County:24

Second, the … government subsidy payments are provided to the project. Thus, those payments
are like a gift or donation of any other kind except they come from the government. In
both Intermountain Health Care and the present case, the crux is the presence or absence of
material reciprocity. It is entirely irrelevant to this analysis that the government, rather than a
private benefactor, chose to make up the deficit resulting from the exchange between St.
Mark’s Tower and the tenants by making a contribution to the landlord, just as it would have
been irrelevant in Intermountain Health Care if the patients’ income supplements had come
from private individuals rather than the government.

Therefore, the fact that subsidization of part of the cost of furnishing such housing is by the
government rather than private charitable contributions does not dictate the denial of a
charitable exemption if the facts otherwise support such an exemption, as they do here.25

In this case, the petitioner adduced substantial evidence that it spent its income, including the subsidies
from the government for 1991 and 1992 for its patients and for the operation of the hospital. It even
incurred a net loss in 1991 and 1992 from its operations.

Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, that those
portions of its real property that are leased to private entities are not exempt from real property taxes
as these are not actually, directly and exclusively used for charitable purposes.

26
The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi
juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is
the exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for
exemption from tax payments must be clearly shown and based on language in the law too plain to be
mistaken.26 As held in Salvation Army v. Hoehn:27

An intention on the part of the legislature to grant an exemption from the taxing power of the
state will never be implied from language which will admit of any other reasonable construction.
Such an intention must be expressed in clear and unmistakable terms, or must appear by
necessary implication from the language used, for it is a well settled principle that, when a
special privilege or exemption is claimed under a statute, charter or act of incorporation, it is to
be construed strictly against the property owner and in favor of the public. This principle applies
with peculiar force to a claim of exemption from taxation . …28

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that the
petitioner shall enjoy the tax exemptions and privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation organized
primarily to help combat the high incidence of lung and pulmonary diseases in the Philippines,
all donations, contributions, endowments and equipment and supplies to be imported by
authorized entities or persons and by the Board of Trustees of the Lung Center of the
Philippines, Inc., for the actual use and benefit of the Lung Center, shall be exempt from income
and gift taxes, the same further deductible in full for the purpose of determining the maximum
deductible amount under Section 30, paragraph (h), of the National Internal Revenue Code, as
amended.

The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees
imposed by the Government or any political subdivision or instrumentality thereof with respect
to equipment purchases made by, or for the Lung Center.29

It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption
privileges for its real properties as well as the building constructed thereon. If the intentions were
otherwise, the same should have been among the enumeration of tax exempt privileges under Section
2:

It is a settled rule of statutory construction that the express mention of one person, thing, or
consequence implies the exclusion of all others. The rule is expressed in the familiar
maxim, expressio unius est exclusio alterius.

The rule of expressio unius est exclusio alterius is formulated in a number of ways. One variation
of the rule is the principle that what is expressed puts an end to that which is
implied. Expressium facit cessare tacitum. Thus, where a statute, by its terms, is expressly
limited to certain matters, it may not, by interpretation or construction, be extended to other
matters.

...

The rule of expressio unius est exclusio alterius and its variations are canons of restrictive
interpretation. They are based on the rules of logic and the natural workings of the human
mind. They are predicated upon one’s own voluntary act and not upon that of others. They
proceed from the premise that the legislature would not have made specified enumeration in a
statute had the intention been not to restrict its meaning and confine its terms to those
expressly mentioned.30

The exemption must not be so enlarged by construction since the reasonable presumption is that the
State has granted in express terms all it intended to grant at all, and that unless the privilege is limited to
the very terms of the statute the favor would be intended beyond what was meant.31

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:

27
 (3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques,
non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used for religious, charitable or educational
purposes shall be exempt from taxation.32

The tax exemption under this constitutional provision covers property taxes only.33 As Chief Justice
Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained: ". . . what is
exempted is not the institution itself . . .; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or educational purposes."34

Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160
(otherwise known as the Local Government Code of 1991) as follows:

SECTION 234. Exemptions from Real Property Tax. – The following are exempted from payment
of the real property tax:

...

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,

mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, andexclusively used for religious, charitable or
educational purposes.35

We note that under the 1935 Constitution, "... all lands, buildings, and improvements used ‘exclusively’
for … charitable … purposes shall be exempt from taxation."36 However, under the 1973 and the present
Constitutions, for "lands, buildings, and improvements" of the charitable institution to be considered
exempt, the same should not only be "exclusively" used for charitable purposes; it is required that such
property be used "actually" and "directly" for such purposes.37

In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on our ruling
in Herrera v. Quezon City Board of Assessment Appeals which was promulgated on September 30, 1961
before the 1973 and 1987 Constitutions took effect.38 As this Court held in Province of Abra v.
Hernando:39

… 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. …

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption,
the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution;
and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.
"Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation
or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege
exclusively."40 If real property is used for one or more commercial purposes, it is not exclusively used for
the exempted purposes but is subject to taxation.41 The words "dominant use" or "principal use" cannot
be substituted for the words "used exclusively" without doing violence to the Constitutions and the
law.42 Solely is synonymous with exclusively.43

What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct
and immediate and actual application of the property itself to the purposes for which the charitable
institution is organized. It is not the use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.44

28
The petitioner failed to discharge its burden to prove that the entirety of its real property is actually,
directly and exclusively used for charitable purposes. While portions of the hospital are used for the
treatment of patients and the dispensation of medical services to them, whether paying or non-paying,
other portions thereof are being leased to private individuals for their clinics and a canteen. Further, a
portion of the land is being leased to a private individual for her business enterprise under the business
name "Elliptical Orchids and Garden Center." Indeed, the petitioner’s evidence shows that it
collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the said lessees.

Accordingly, we hold that the portions of the land leased to private entities as well as those parts of the
hospital leased to private individuals are not exempt from such taxes.45 On the other hand, the portions
of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or
non-paying, are exempt from real property taxes.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent Quezon City
Assessor is hereby DIRECTED to determine, after due hearing, the precise portions of the land and the
area thereof which are leased to private persons, and to compute the real property taxes due thereon as
provided for by law.

SO ORDERED.

29