Alvarez vs. Guingona, Jr.

Internal Revenue Allotments form part of the income of local government units for purposes of meeting the minimum average annual income requirement for conversion into a component city, and a bill of local application is deemed to have originated exclusively in the House of Representatives when the House bill was filed first and initiated the legislative process, even if the Senate filed a counterpart substitute bill in anticipation, provided the Senate does not act on its own bill until it receives the House version.

Petitioners include Senator Heherson T. Alvarez, Senator Jose D. Lina, Jr., and several private individuals who opposed the conversion of the Municipality of Santiago, Isabela into an independent component city. Respondents include the Executive Secretary, the Secretary of Local Government, the Secretary of Budget, the Commission on Audit, the Municipal Mayor and Sangguniang Bayan members of Santiago, the Municipal Treasurer, and the Municipal Administrator. The dispute centers on the constitutionality and statutory validity of Republic Act No. 7720, entitled "An Act Converting the Municipality of Santiago, Isabela into an Independent Component City to be known as the City of Santiago," which was signed into law on May 5, 1994 and ratified by plebiscite on July 13, 1994. The challenge invokes Section 24, Article VI of the 1987 Constitution, requiring bills of local application to originate exclusively in the House of Representatives, and Section 450 of the Local Government Code of 1991, prescribing the minimum income threshold for cityhood.

On April 18, 1993, House Bill No. 8817, entitled "An Act Converting the Municipality of Santiago into an Independent Component City to be known as the City of Santiago," was filed in the House of Representatives with Representative Antonio Abaya as principal author, co-sponsored by Representatives Ciriaco Alfelor, Rodolfo Albano, Santiago Respicio, and Faustino Dy. The bill was referred to the House Committee on Local Government and the House Committee on Appropriations on May 5, 1993. Public hearings were conducted on May 19, 1993, June 1, 1993, November 28, 1993, and December 1, 1993, after which the committee submitted a favorable report with amendments on December 9, 1993. The House passed HB No. 8817 on Second Reading on December 13, 1993, and on Third Reading on December 17, 1993, transmitting it to the Senate on January 28, 1994.

Meanwhile, a counterpart measure, Senate Bill No. 1243, bearing the same title, was filed in the Senate on May 19, 1993, introduced by Senator Vicente Sotto III as principal sponsor — one day after the House had conducted its first public hearing on HB No. 8817. On February 23, 1994, less than a month after HB No. 8817 was transmitted to the Senate, the Senate Committee on Local Government conducted public hearings on SB No. 1243. On March 1, 1994, the committee submitted Committee Report No. 378 on HB No. 8817, recommending approval without amendment, noting that HB No. 8817 was on all fours with SB No. 1243. Senator Heherson T. Alvarez, one of the herein petitioners, signed the report as a member of the Committee on Local Government, indicating his approval.

Committee Report No. 378 was passed by the Senate on Second Reading on March 3, 1994, and approved on Third Reading on March 14, 1994. On March 22, 1994, the House of Representatives, upon being apprised of the Senate's action, approved the amendments proposed by the Senate. The enrolled bill was submitted to the President on April 12, 1994, and signed into law as Republic Act No. 7720 on May 5, 1994. A plebiscite held on July 13, 1994 yielded a great majority of registered voters of Santiago favoring the conversion into a city.

Petitioners contended that Santiago's average annual income for 1991 and 1992, computed at 1991 constant prices and excluding IRAs, amounted to only P13,109,560.47 — far below the P20,000,000.00 threshold prescribed by Section 450 of the Local Government Code. They argued that IRAs are not income but transfers or budgetary aid from the national government, subject to fluctuation based on population, land area, and equal sharing. The Bureau of Local Government Finance of the Department of Finance, however, certified Santiago's average annual income at P20,974,581.97, a figure that included IRAs in the computation.

• Income Requirement Not Met: Petitioners argued that Santiago's average annual income for 1991 and 1992 based on 1991 constant prices, after deducting IRAs totaling P15,730,043.00, amounted to only P13,109,560.47 — well below the P20,000,000.00 minimum required under Section 450 of the Local Government Code for conversion into a component city.
• IRAs Are Not Income: Petitioners asseverated that IRAs are not actually income but transfers and/or budgetary aid from the national government, and that they fluctuate depending on factors such as population, land area, and equal sharing. They further claimed that the certification issued by the Bureau of Local Government Finance was inaccurate because IRAs were not excluded from the computation.
• Violation of Origination Clause: Petitioners claimed that RA 7720 did not originate exclusively in the House of Representatives as mandated by Section 24, Article VI of the 1987 Constitution, because the Senate passed SB No. 1243, its own version of HB No. 8817, on the same subject matter.

• Inclusion of IRAs in Income Computation: Whether Internal Revenue Allotments are to be included in the computation of the average annual income of a municipality for purposes of its conversion into an independent component city.
• Compliance with Origination Clause: Whether Republic Act No. 7720 can be said to have originated in the House of Representatives, considering that the Senate passed SB No. 1243, its own version of HB No. 8817.

• Inclusion of IRAs in Income Computation: Yes. IRAs form part of the income of local government units because they constitute gross accretions of funds that regularly and automatically accrue to the local treasury without need of further action by the local government unit, and are thus properly included in computing the average annual income for cityhood conversion under Section 450 of the Local Government Code.
• Compliance with Origination Clause: Yes. HB No. 8817 was filed in the House on April 18, 1993, before SB No. 1243 was filed in the Senate on May 19, 1993, and the Senate withheld action on its own bill until it received the House bill already approved on Third Reading. The filing of a Senate substitute bill in anticipation of receipt of the House bill does not contravene the constitutional requirement.

• Inclusion of IRAs in Income Computation: The Court anchored its analysis on the principles of local autonomy and decentralization underlying the Local Government Code. A local government unit is a political subdivision vested with substantial control over its own affairs, given more powers, responsibilities, and resources. The vesting of duty and accountability is accompanied by provision for reasonably adequate resources, effectuated through three rights: (1) the right to create and broaden its own sources of revenue; (2) the right to be allocated a just share in national taxes, in the form of IRAs; and (3) the right to an equitable share in proceeds from national wealth utilization. The Local Government Code defines income as "all revenues and receipts collected or received forming the gross accretions of funds of the local government unit" (Section 306(i)). IRAs are items of income because they form part of the gross accretion of funds, regularly and automatically accruing to the local treasury without need of further action by the local government unit (Section 7). Section 450(c) of the Code provides that average annual income shall include income accruing to the general fund, exclusive of special funds, transfers, and non-recurring income. IRAs are a regular, recurring item of income and have a technical meaning distinct from the "transfers" or "special funds" referred to elsewhere in the Code (Section 17(g)). Department of Finance Order No. 35-93, issued June 16, 1993, defined annual income to include "the internal revenue allotment and other shares" while excluding non-recurring receipts such as national aids, grants, financial assistance, loan proceeds, and sales of fixed assets. This executive or contemporaneous construction by an administrative agency charged with interpreting the statute is entitled to full respect and great weight unless shown to be in sharp conflict with the Constitution or governing statute. The Department of Finance thus correctly certified Santiago's average annual income at P20,974,581.97, inclusive of IRAs.

• Compliance with Origination Clause: The Court found that HB No. 8817 was filed in the House on April 18, 1993, while SB No. 1243 was filed in the Senate only on May 19, 1993. The filing of HB No. 8817 was thus precursive not only of RA 7720 but also of SB No. 1243, and HB No. 8817 initiated the legislative process culminating in the enactment of the law. Petitioners themselves acknowledged that HB No. 8817 was already approved on Third Reading and transmitted to the Senate on January 28, 1994, before the Senate Committee on Local Government conducted its public hearing on SB No. 1243 on February 23, 1994. The Senate thus held in abeyance any action on its own bill until it received the House bill. Relying on Tolentino vs. Secretary of Finance, the Court explained that the Constitution requires the bill — not the law — to originate exclusively in the House; the Senate retains its power to propose amendments and even to produce a distinct bill through substitution. The filing of a substitute bill in the Senate in anticipation of receipt of the House bill does not contravene the origination requirement, so long as the Senate does not act thereupon until it receives the House bill. The constitutional design rests on the theory that House members, elected from districts, are more sensitive to local needs, while senators, elected at large, approach problems from a national perspective — both views bearing on the enactment of such laws.

• IRA as Income of Local Government Units — Internal Revenue Allotments form part of the income of local government units because they constitute gross accretions of funds that regularly and automatically accrue to the local treasury without need of further action by the local government unit. Under Section 306(i) of the Local Government Code, income is defined as "all revenues and receipts collected or received forming the gross accretions of funds of the local government unit." IRAs are distinct from "special funds" or "transfers" referred to in Section 17(g) of the Code, which pertain to funding support from the national government, its instrumentalities, and government-owned-or-controlled corporations. Accordingly, IRAs are properly included in computing the average annual income required under Section 450 for conversion of a municipality into a component city.

• Origination Clause — Bills of Local Application — Section 24, Article VI of the 1987 Constitution requires that bills of local application originate exclusively in the House of Representatives. What the Constitution requires to "originate exclusively" is the bill — not the law — that initiates the legislative process. The Senate retains the power to propose amendments, including substitution, and may file a counterpart bill in anticipation of receiving the House bill, provided the Senate withholds action on its own bill until the House version is received. The initiative for filing bills of local application must come from the House, on the theory that district-elected representatives are more sensitive to local needs, while senators elected at large approach the same problems from a national perspective.

• Presumption of Constitutionality — Every law has in its favor the presumption of constitutionality. To nullify a law, there must be shown a clear and unequivocal breach of the Constitution, not merely a doubtful and equivocal one; the grounds for nullity must be clear and beyond reasonable doubt. Those who petition the Court to declare a law unconstitutional must clearly and fully establish the basis for such declaration; otherwise, the petition must fail.

• Contemporaneous Construction by Administrative Agencies — An executive or contemporaneous construction of a statute by an administrative agency charged with the task of interpreting and applying the same is entitled to full respect and should be accorded great weight by the courts, unless such construction is clearly shown to be in sharp conflict with the Constitution, the governing statute, or other laws.

• "The IRAs are items of income because they form part of the gross accretion of the funds of the local government unit. The IRAs regularly and automatically accrue to the local treasury without need of any further action on the part of the local government unit." — This passage articulates the ratio decidendi on the first issue, establishing that IRAs constitute income of local government units because of their regular and automatic accrual, thereby satisfying the statutory definition of income under the Local Government Code.

• "The filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House, does not contravene the constitutional requirement that a bill of local application should originate in the House of Representatives, for as long as the Senate does not act thereupon until it receives the House bill." — This formulation defines the operative test for compliance with the origination clause when the Senate files a counterpart bill, and is the controlling rule on the interplay between House initiative and Senate amendment power.

• "To begin with, it is not the law — but the revenue bill — which is required by the Constitution to 'originate exclusively' in the House of Representatives." — Quoted from Tolentino vs. Secretary of Finance, this passage distinguishes between the bill that initiates the legislative process and the resulting law, clarifying that the Constitution's origination requirement pertains to the former and preserves the Senate's coequal power to propose amendments.

• "Consequently, for RA No. 7720 to be nullified, it must be shown that there is a clear and unequivocal breach of the Constitution, not merely a doubtful and equivocal one; in other words, the grounds for nullity must be clear and beyond reasonable doubt." — This states the standard of proof for constitutional challenges, reinforcing the presumption of constitutionality and the burden on petitioners to overcome it.

• Tolentino vs. Secretary of Finance, 235 SCRA 630 — Controlling precedent followed. The Court relied on this case for the principle that the Constitution requires the bill — not the law — to originate exclusively in the House, and that the Senate may file a substitute bill in anticipation of receipt of the House bill so long as it withholds action until the House bill arrives. The Court applied the same reasoning to bills of local application.
• Basco vs. PAGCOR, 197 SCRA 52 — Cited for the definition of a local government unit as a political subdivision of the State constituted by law and possessed of substantial control over its own affairs, and for the presumption of constitutionality doctrine.
• Nestle Philippines, Inc. vs. Court of Appeals, 203 SCRA 504 — Cited for the doctrine that contemporaneous construction of a statute by an administrative agency charged with interpreting and applying it is entitled to full respect and great weight by the courts.
• Abbas vs. COMELEC, 179 SCRA 287 — Cited in support of the presumption of constitutionality of laws.

• Section 24, Article VI, 1987 Constitution — Requires that bills of local application originate exclusively in the House of Representatives. The Court held that this requirement was satisfied because HB No. 8817 was filed first in the House and initiated the legislative process, and the Senate withheld action on its counterpart bill until it received the House version.
• Section 450, Local Government Code of 1991 — Prescribes the minimum average annual income of at least P20,000,000.00 for the last two consecutive years based on 1991 constant prices as a requisite for converting a municipality into a component city. Section 450(c) provides that average annual income shall include income accruing to the general fund, exclusive of special funds, transfers, and non-recurring income. The Court held that IRAs are included in this computation.
• Section 306(i), Local Government Code of 1991 — Defines income as "all revenues and receipts collected or received forming the gross accretions of funds of the local government unit." The Court relied on this definition to conclude that IRAs are items of income.
• Section 7, Local Government Code of 1991 — Provides that the IRA share of each local government unit shall be released directly and automatically to it, without need of further action. The Court used this provision to establish that IRAs regularly and automatically accrue to the local treasury.
• Section 17(g), Local Government Code of 1991 — Refers to "funding support from the national government, its instrumentalities and government-owned-or-controlled corporations," which the Court distinguished from IRAs, holding that IRAs have a technical meaning distinct from the "transfers" or "special funds" contemplated in this provision.
• Department of Finance Order No. 35-93 (June 16, 1993) — Defined annual income to include "the internal revenue allotment and other shares" while excluding non-recurring receipts such as national aids, grants, financial assistance, loan proceeds, and sales of fixed assets. The Court accorded this administrative construction great weight as contemporaneous interpretation of the Local Government Code.

Narvasa, C.J., Padilla, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Francisco, and Panganiban, JJ., concurred.