Allied Banking Corporation vs. Quezon City Government

A local government unit exceeds its statutory authority and acts ultra vires when it enacts an ordinance fixing real property tax assessments based solely on the consideration appearing in the deed of conveyance or the Bureau of Internal Revenue zonal valuation, as such method illegally delegates the appraisal function to private parties, disregards the statutory definition of fair market value and the principle of actual use, violates the uniformity requirement of the Constitution, and circumvents the three-year general revision period mandated by the Local Government Code, rendering the ordinance void ab initio and conferring no rights from its inception.

The dispute arose from a special assessment provision enacted by the Quezon City Government as part of its general revision of real property assessments. The provision created a distinct classification and valuation methodology for properties that were sold, ceded, transferred, or conveyed for remuneratory consideration, requiring that such properties be taxed based on the transaction price or current zonal valuation rather than the standard schedule of fair market values. This mechanism resulted in significantly higher tax assessments for newly acquired properties compared to similarly situated properties that had not been recently transferred, prompting a constitutional and statutory challenge from a property owner who purchased land at a substantial price and faced a drastic increase in its real property tax liability.

• On December 19, 1995, the Quezon City Government enacted Ordinance No. 357, Series of 1995, entitled "An Ordinance Approving the Schedule of Fair Market Values for Land, Buildings and Other Structures Situated in Quezon City," which undertook a general revision of real property assessments; Section 3 thereof contained a proviso mandating that parcels of land sold, ceded, transferred, or conveyed for remuneratory consideration after the effectivity of the revision be subject to real estate tax based on the actual amount reflected in the deed of conveyance or the current approved zonal valuation of the Bureau of Internal Revenue prevailing at the time of sale, whichever is higher, as evidenced by the certificate of payment of capital gains tax.

• On July 1, 1998, petitioner Allied Banking Corporation, acting as trustee for College Assurance Plan of the Philippines, Inc., purchased from Liwanag C. Natividad et al. a 1,000 square meter parcel of land located along Aurora Boulevard, Quezon City, for the total amount of ₱38,000,000.00; prior to the sale, the previous owners had been paying an annual real property tax of ₱85,050.00 based on a fair market value of ₱4,500,000.00 and an assessed value of ₱1,800,000.00 under Tax Declaration No. D-102-03778.

• Following the acquisition, the City Assessor issued Tax Declaration No. D-102-03780 which pegged the market value of the property at ₱38,000,000.00 (the consideration appearing in the Deed of Absolute Sale) and the assessed value at ₱15,200,000.00, resulting in a quarterly real estate tax obligation of ₱102,600.00 or ₱410,400.00 annually, which was approximately five times higher than the tax paid by the previous owners.

• Petitioner paid the real property taxes for the 1st quarter of 1999 up to the 3rd quarter of 2000, but made payments for the 2nd, 3rd, and 4th quarters of 1999 and the 1st and 2nd quarters of 2000 under written protest, assailing Section 3 of the ordinance as violative of the equal protection and uniformity of taxation clauses of the Constitution, as well as unjust, excessive, oppressive, and contrary to Section 130 of the Local Government Code.

• On March 24, 2000, petitioner sent a demand letter to the Quezon City Treasurer seeking a refund of the taxes erroneously collected, which was referred to the City Assessor who denied the demand on May 7, 2000, on the ground that the ordinance is presumed valid unless declared otherwise by a court of competent jurisdiction.

• On March 6, 2001, the Quezon City Government enacted Ordinance No. SP-1032, S-2001, repealing the assailed proviso in Section 3, citing therein that the implementation of the provision created inequitable situations where owners of newly acquired land paid higher taxes than adjoining lots, that the proviso was violative of the uniformity rule of taxation, and that it was arbitrary, unjust, excessive, and contrary to law.

• Petitioner contended that Section 3 of Quezon City Ordinance No. 357, Series of 1995, is null and void ab initio because it creates an invalid classification between real properties that are transferred, ceded, or conveyed for remuneratory consideration and those which are not, thereby violating the constitutional guarantees of equal protection and uniformity of taxation under Article VI, Section 28(1) of the Constitution.

• Petitioner argued that the proviso is unjust, excessive, oppressive, confiscatory, and contrary to Section 130 of the Local Government Code, specifically violating the fundamental principles that taxation shall be uniform and not unjust, excessive, oppressive, or confiscatory.

• Petitioner maintained that the proviso violates Sections 219 and 220 of the Local Government Code, which provide that the assessment of real property shall not be increased oftener than once every three years, except in cases of new improvements or change in actual use, because the proviso effectively mandates a reassessment every time a property is sold within the three-year period.

• Petitioner asserted that while the subsequent repeal of the ordinance rendered the action for declaratory relief moot, the repeal did not affect the claim for refund and attorney's fees, and the trial court was still required to determine whether the provision was void ab initio and unenforceable during the period between enactment and repeal, contending that the repealing ordinance should be given retroactive effect.

• Petitioner claimed that the trial court erred in dismissing the case for failure to exhaust administrative remedies, arguing that the case involved purely legal questions regarding the constitutionality and validity of the ordinance, which are exceptions to the exhaustion doctrine.

• Respondents contended that the enactment of Ordinance No. SP-1032, S-2001, which repealed the assailed provision, rendered the petition for prohibition and declaratory relief moot and academic, as there was no longer any justiciable controversy to be resolved.

• Respondents maintained that the assailed proviso remained in full force and effect from its enactment until the date of its repeal on March 28, 2001, based on the statutory construction rule that laws are prospective unless the legislative intent for retrospective application is clearly expressed, citing that the repealing ordinance explicitly provided it shall take effect upon approval, indicating prospective application only.

• Respondents argued that petitioner failed to exhaust administrative remedies as required by the Local Government Code, specifically Sections 226, 229, and 230, which establish a hierarchical appeal process from the Local Board of Assessment Appeals to the Central Board of Assessment Appeals, and that the trial court correctly dismissed the claim for refund on this ground.

• Respondents asserted that the claim for refund was premature because petitioner had an adequate administrative remedy available under Sections 252 and 226 of the Local Government Code, which provide specific procedures for protesting tax payments and appealing assessments before resorting to judicial action.

• Procedural Issues: Whether the trial court erred in dismissing the petition for failure to exhaust administrative remedies under the Local Government Code; and whether the petition had become moot and academic by virtue of the subsequent repeal of the assailed ordinance provision.

• Substantive Issues: Whether Section 3 of Quezon City Ordinance No. 357, Series of 1995, which mandated assessment based on the consideration in the deed of conveyance or BIR zonal valuation, is a valid exercise of local taxing power; whether the provision contravenes the Local Government Code, Local Assessment Regulations, and constitutional provisions on uniformity of taxation; and whether petitioner is entitled to a refund of taxes paid under protest.

• Procedural: The Supreme Court held that the trial court correctly dismissed the action for prohibition as premature because petitioner had a plain, speedy, and adequate remedy in the ordinary course of law by appealing the assessment to the Local Board of Assessment Appeals and subsequently to the Central Board of Assessment Appeals as provided in Sections 226, 229, and 230 of the Local Government Code, and that the claim for refund should be lodged with the Local Board of Assessment Appeals, subject to the statute of limitations; however, the Court assumed jurisdiction to resolve the validity of the ordinance to prevent future similar controversies involving public interest, noting that the case involved significant questions of law regarding the extent of local legislative power in real property assessment.

• Substantive: The Court declared the assailed proviso in Section 3 of Ordinance No. 357, Series of 1995, invalid and void ab initio for being ultra vires; the provision contravened the Local Government Code (specifically Sections 198, 201, 219, and 220) and Local Assessment Regulations No. 1-92, which mandate that real property be appraised at the current and fair market value prevailing in the locality based on the sales analysis approach, income capitalization approach, or reproduction cost approach, and classified according to actual use, rather than being based solely on the consideration in the deed of conveyance or BIR zonal valuation.

• The Court ruled that using the consideration in the deed of conveyance to determine tax assessments is illegal because it effectively delegates the appraisal function to private parties (the buyer and seller) in violation of Section 198(d) of the Local Government Code, which prohibits the appraisal, assessment, levy, and collection of real property tax from being let to any private person.

• The Court held that the ordinance violated the constitutional and statutory principle of uniformity in taxation by creating arbitrary classifications between recently sold properties and properties that remained undisturbed, resulting in inequitable tax burdens where owners of identical adjoining properties would pay significantly different taxes based solely on the date of acquisition.

• The Court found that the ordinance circumvented the three-year general revision rule under Sections 219 and 220 of the Local Government Code, which limits assessment increases to once every three years except in cases of new improvements or change in use, because the proviso mandated an automatic reassessment every time a property was sold, transferred, or conveyed.

• The Court further held that the ordinance was contrary to public policy and in restraint of trade because it created a chilling effect on real property transactions, forcing owners to either hold onto property until after the three-year period lapsed or sell at prices not exceeding prior conveyances to avoid higher tax assessments, thereby unduly hampering the equitable distribution of wealth and free contract rights.

• The Court concluded that the ordinance was void ab initio and conferred no legal rights from its inception, and that taxes collected pursuant to an ultra vires ordinance may be recovered, provided the claim is filed with the proper administrative body (Local Board of Assessment Appeals) within the statutory limitations period.

• Ultra Vires — An ordinance enacted by a local government unit that contravenes, deviates from, or fails to follow the standards, procedures, and limitations established by statute is beyond the powers conferred upon the local legislative body, is void ab initio, and confers no rights from its inception.

• Exhaustion of Administrative Remedies — As a general rule, courts will not entertain judicial actions until administrative remedies available within the statutory scheme have been exhausted; however, this doctrine admits of exceptions when the controversy involves purely legal questions or when the administrative remedy is inadequate, although claims for refunds requiring factual determinations of amounts paid must proceed through the administrative hierarchy established by the Local Government Code (Local Board of Assessment Appeals to Central Board of Assessment Appeals).

• Uniformity in Taxation — The constitutional mandate under Article VI, Section 28(1) requires that all properties of the same class be taxed at the same rate, and the local assessor has the statutory obligation to ensure this uniformity by applying standardized valuation methods rather than allowing private transaction prices to dictate tax assessments.

• Fair Market Value Determination — Under the Local Government Code and Local Assessment Regulations No. 1-92, fair market value is defined as the price at which a property may be sold by a seller who is not compelled to sell and bought by a buyer who is not compelled to buy, taking into consideration all uses to which the property is adapted, and must be determined through prescribed appraisal approaches (sales analysis, income capitalization, or reproduction cost) rather than solely by the actual consideration paid in a specific transaction.

• Actual Use Principle — Real property must be classified, valued, and assessed based on its actual use regardless of where it is located, whoever owns it, and whoever uses it; any assessment method that disregards this principle by relying solely on purchase price is invalid.

• Void Ab Initio — Legislative acts or ordinances that are ultra vires are void from the beginning and acquire no legal effect, and taxes collected pursuant to such void provisions may be subject to refund if claimed within the proper administrative channels and statutory periods.

• "An ordinance that contravenes any statute is ultra vires and void."

• "Using the consideration appearing in the deed of conveyance to assess or appraise real properties is not only illegal since 'the appraisal, assessment, levy and collection of real property tax shall not be let to any private person,' but it will completely destroy the fundamental principle in real property taxation – that real property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it."

• "What a thing has cost is no singular and infallible criterion of its market value."

• "Fair market value is the price at which a property may be sold by a seller who is not compelled to sell and bought by a buyer who is not compelled to buy, taking into consideration all uses to which the property is adapted and might in reason be applied."

• "The criterion established by the statute contemplates a hypothetical sale. Hence, the buyers need not be actual and existing purchasers."

• Ty v. Trampe — Cited to establish the general rule requiring exhaustion of administrative remedies and the recognized exception for cases involving purely legal questions rather than factual disputes.

• Manila Electric Company v. Barlis — Cited to support the principle that an action for prohibition is premature when a plain, speedy, and adequate remedy exists in the ordinary course of law, specifically the administrative appeal process provided in the Local Government Code.

• Board of Optometry v. Colet — Cited for the enumeration of the requisites that must be complied with before the Supreme Court can exercise its power of judicial review over constitutional questions, including the presence of an actual case, ripeness, standing, and the requirement that the constitutional issue be the very lis mota of the case.

• Reyes v. Almanzor — Cited to emphasize that assessors, in fixing the value of real property, must consider all circumstances and elements of value and exercise prudent discretion in reaching conclusions, functions which the assailed ordinance completely dispensed with.

• Army and Navy Club, Manila v. Trinidad — Cited for the authoritative definition of fair market value and the principle that the cost of property is not a singular or infallible criterion of its market value for tax purposes.

• Magtajas v. Pryce Properties Corp., Inc. — Cited for the principle that an ordinance enacted by a local government unit that contravenes a statute is ultra vires and void.

• Churchill v. Concepcion and Eastern Theatrical Co. v. Alfonso — Cited to illustrate the uniformity rule in taxation, holding that uniformity means all kinds of property of the same class shall be taxed at the same rate, and that disparity in tax treatment between similarly situated properties violates this constitutional guarantee.

• Macapagal v. Court of Appeals and Silverio v. Court of Appeals — Cited to reiterate the principle that the Supreme Court is not a trier of facts and that factual findings of lower courts are conclusive upon it, absent specific exceptions.

• Pareño v. Sandiganbayan — Cited for the exceptions to the rule of conclusiveness of factual findings, including instances where the conclusion is grounded on speculation, manifestly mistaken, or based on misapprehension of facts.

• Constitution, Article VI, Section 28(1) — Mandates that the rule of taxation shall be uniform and equitable, which the assailed ordinance violated by creating disparate tax treatment between recently transferred properties and undisturbed properties of the same class.

• Constitution, Article X, Section 5 — Provides that local government units may create their own sources of revenue and levy taxes subject to guidelines and limitations as Congress may provide, emphasizing that local fiscal autonomy is not absolute but subject to statutory constraints.

• Local Government Code (Republic Act No. 7160), Section 130 — Enumerates the fundamental principles governing the exercise of taxing powers by local government units, including that taxation shall be uniform in each local government unit and that taxes shall not be unjust, excessive, oppressive, or confiscatory.

• Local Government Code, Section 198(b) — Defines "actual use" as the purpose for which the property is principally or predominantly utilized by the person in possession thereof, which must be the basis for classification and assessment.

• Local Government Code, Section 198(d) — Provides that the appraisal, assessment, levy, and collection of real property tax shall not be let to any private person, a prohibition violated by the ordinance which relied on private deed considerations.

• Local Government Code, Section 198(l) — Defines "fair market value" as the price at which a property may be sold by a willing seller to a willing buyer, which the ordinance contravened by mandating consideration-based valuation.

• Local Government Code, Section 201 — Requires that real property be appraised at the current and fair market value prevailing in the locality where the property is situated.

• Local Government Code, Section 217 — Mandates that real property be classified, valued, and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it.

• Local Government Code, Section 219 — Provides that the provincial, city, or municipal assessor shall undertake a general revision of real property assessments every three years.

• Local Government Code, Section 220 — Prohibits the assessment of real property from being increased oftener than once every three years, except in cases of new improvements substantially increasing value or any change in actual use.

• Local Government Code, Sections 226, 229, and 230 — Establish the administrative appeal process, providing that appeals from the assessor's action shall be filed with the Local Board of Assessment Appeals within sixty days, and that further appeals from the Local Board's decision may be taken to the Central Board of Assessment Appeals within thirty days.

• Local Government Code, Section 252 — Prescribes the procedure for payment of real property taxes under protest, including the requirement that the protest in writing must be filed within thirty days from payment to the local treasurer.

• Local Assessment Regulations No. 1-92 — Issued by the Department of Finance pursuant to the Local Government Code, prescribing the three approaches (sales analysis or market data approach, income capitalization approach, and reproduction or reproduction cost approach) for estimating fair market value, and establishing the duties of assessors in preparing schedules of market values.

• Civil Code, Article 4 — Cited for the rule that laws shall have no retroactive effect unless the contrary is provided, which respondents invoked to argue that the repealing ordinance applied only prospectively.

• Rules of Court, Rule 45, Section 1 — Governs appeals by certiorari to the Supreme Court, limiting review to questions of law only.

• Rules of Court, Rule 65, Section 1 — Governs special civil actions for prohibition, which petitioner invoked as the basis for its petition in the trial court.