Collector of Internal Revenue vs. Manila Lodge No. 761

The fixed privilege taxes imposed under Section 193 of the Tax Code, in relation to Section 178, apply only to persons or entities engaged in the "business" of selling liquor and tobacco, and a fraternal, civic, non-stock, non-profit organization that sells such articles exclusively to its members and their guests at prices merely sufficient to cover operational expenses, without intention to obtain profit, is not engaged in such business and is not liable for these taxes. The term "business" as used in the Tax Code must be construed in its plain and ordinary meaning, restricted to activities pursued for profit or livelihood.

The Manila Lodge No. 761 of the Benevolent & Protective Order of Elks is a fraternal, civic, non-stock, non-profit organization duly incorporated under Philippine laws. It owns and operates a clubhouse located at Dewey Boulevard, Manila, where it sells at retail liquor, fermented liquor, cigars, and cigarettes only to its members and their guests. The Bureau of Internal Revenue discovered that the Lodge had not paid the privilege taxes for retail liquor dealer, retail dealer in fermented liquor, and retail tobacco dealer prescribed in Section 193 of the Tax Code, and the Collector of Internal Revenue assessed the Lodge for these taxes covering the period from the 4th quarter of 1946 to 1955.

The Manila Lodge No. 761 of the Benevolent & Protective Order of Elks is a fraternal, civic, non-stock, non-profit organization duly incorporated under Philippine laws. It owns and operates a clubhouse located at Dewey Boulevard, Manila, wherein it sells at retail liquor, fermented liquor, cigars, and cigarettes only to its members and their guests. Bureau of Internal Revenue agents discovered that the Lodge had not paid, for the period in question, the privilege taxes for retail liquor dealer, retail dealer in fermented liquor, and retail tobacco dealer prescribed in Section 193 of the Tax Code.

On November 19, 1953, the Collector of Internal Revenue assessed and demanded from the Lodge the sum of P1,203.50 representing fixed taxes as retail dealer for the period from the 4th quarter of 1946 to 1953, exclusive of the suggested compromise penalty of P80.00. The Lodge, claiming exemption from the payment of the privilege taxes, requested that the assessment be reviewed by the Conference Staff of the Bureau of Internal Revenue, which upheld and reiterated the assessment. The Lodge then appealed to the Court of Tax Appeals on June 1, 1955. During the pendency of the original petition, the Collector issued another assessment covering fixed taxes for the years 1954 to 1955 in the amount of P332.00, exclusive of the suggested compromise penalty of P50.00, which the Lodge included in a supplemental petition for review.

The Lodge based its claim for exemption on the ground that it is not engaged in the business of selling at retail liquor, fermented liquor, and tobacco because the sale of these goods is made only to members of the club and their guests on a very limited scale, in pursuance only of its general purpose as a fraternal social club, to provide comfort, recreation, and convenience to such members, and merely to provide enough margin to cover operational expenses. The Collector, on the other hand, maintained that persons selling articles subject to specific tax, such as cigars, tobacco, liquor, and the like, are subject to the fixed taxes imposed by Section 193 of the Tax Code, irrespective of whether or not they made profit, and whether or not they are civic or fraternal clubs selling only to their members and their guests, based on a ruling promulgated by the Bureau of Internal Revenue in 1921.

The Court of Tax Appeals found that the Lodge, in pursuance of its purpose as a fraternal social club, sells on retail at its clubhouse liquor, cigars, and cigarettes on a very limited scale, only to its members and their guests, providing just enough margin to cover operational expenses without intention to obtain profit. The Court of Tax Appeals held that the Lodge could not be considered as engaged in the "business" of selling liquor and tobacco and therefore could not be held liable for the privilege taxes required by Section 193, subsections (i), (k), and (n).

• Error in Reversing the Collector's Decision: The petitioner argued that the Court of Tax Appeals erred in reversing the decision of the Collector which held the respondent club liable for fixed taxes.
• Necessity of Being Engaged in "Business": The petitioner argued that the Court of Tax Appeals erred in holding that before the respondent club's liability for the privilege taxes imposed by Section 193 of the Tax Code attaches, it is necessary that it be engaged in the "business" of selling liquor and tobacco.
• Non-Profit Organization's Liability: The petitioner argued that the Court of Tax Appeals erred in holding that a fraternal, civic, non-stock, non-profit organization like the respondent club, selling at retail liquor and tobacco only to its members and their guests with just enough margin to cover operational expenses, should not be held liable for the fixed taxes incident to the business of selling at retail liquor and tobacco.
• Administrative Construction: The petitioner argued that the Court of Tax Appeals erred in holding that the administrative construction of the Bureau of Internal Revenue on the matter is outside the ambit of, and is inconsistent with, the Revised Administrative Code and Tax Code.
• Legislative Reenactment: The petitioner insisted that the Lodge should pay the privilege tax because this has been the practice consistently followed by the Bureau of Internal Revenue since 1921, and because Section 1464 of the Revised Administrative Code, under which said ruling was then based, had been reenacted by the legislature as Section 193 of the National Internal Revenue Code, thus gaining "approval by legislative reenactment."
• Emphasis on Statutory Definitions: The petitioner urged that emphasis should be placed not on the term "business" but on the phrases "retail liquor dealers," "retail dealers in fermented liquors," and "retail tobacco dealers" appearing in Section 193, which are defined in Section 194 of the National Internal Revenue Code.
• Inapplicability of American Authorities: The petitioner assailed the applicability of the decisions relied upon by the Court of Tax Appeals on the ground that said decisions refer to the authority to license, and hence to the exercise of police power, not that of taxation which is involved in the case at bar.

• Exemption from Privilege Taxes: The respondent Lodge maintained that it is not engaged in the business of selling at retail liquor, fermented liquor, and tobacco because the sale of these goods is made only to members of the club and their guests on a very limited scale, in pursuance only of its general purpose as a fraternal social club, to provide comfort, recreation, and convenience to such members, and merely to provide enough margin to cover operational expenses.

• Liability for Privilege Taxes: Whether the respondent Lodge is liable for the fixed privilege taxes imposed under Section 193, subsections (i), (k), and (n), in relation to Section 178, of the Tax Code, for its sale by retail of liquor and tobacco exclusively to its members and their guests.
• Meaning of "Business": Whether the term "business" as used in Sections 178 and 193 of the Tax Code should be construed in its plain and ordinary meaning, restricted to activities pursued for profit or livelihood.
• Effect of Administrative Construction: Whether the 1921 administrative ruling of the Bureau of Internal Revenue, allegedly reenacted by the legislature, should be given effect notwithstanding its inconsistency with the clear language of the Tax Code.

• Liability for Privilege Taxes: No. The respondent Lodge is not liable for the privilege taxes on its sale by retail of liquor and tobacco exclusively to its members and their guests, because it is not engaged in the "business" of selling liquor and tobacco within the meaning of Sections 178 and 193 of the Tax Code.
• Meaning of "Business": Yes. The term "business" as used in the Tax Code must be construed in its plain and ordinary meaning, restricted to activities pursued for profit or livelihood, and a non-stock, non-profit fraternal organization selling only to members and guests at cost-covering prices is not engaged in business.
• Effect of Administrative Construction: No. The administrative ruling of 1921 cannot be sustained because it is inconsistent with the clear and unambiguous provisions of the Tax Code, and no amount of adherence to an established practice may justify its continued application where it is not in consonance with the policy of the legislature as defined by law.

• Liability for Privilege Taxes: The Court examined Sections 178 and 193 of the Tax Code and found that the privilege taxes prescribed therein are imposed for "business" purposes. This evident intention of the law is made more palpable by the fact that the drafters of the Tax Code grouped these provisions under Title V, "Privilege Taxes on Business and Occupation." The Court quoted the Court of Tax Appeals' reasoning that it is not entirely correct to maintain that all persons selling articles subject to specific taxes, like liquor and tobacco, should likewise be subject to the fixed taxes imposed by Section 193. In order for these persons to be subjected to the privilege taxes, it is necessary that they be engaged in the "business" of selling liquor and tobacco; otherwise, the privilege taxes as a dealer of liquor and tobacco cannot attach. The Court found that the Lodge, being a fraternal, civic, non-stock, non-profit organization that sells liquor, cigars, and cigarettes on a very limited scale, only to its members and their guests, providing just enough margin to cover operational expenses without intention to obtain profit, cannot be considered as engaged in the "business" of selling liquor and tobacco.
• Meaning of "Business": The Court adopted the definition of "business" from various legal authorities, including Ballantine's Law Dictionary, which defines it as "human efforts which have for their purpose a living or reward," and Merriam-Webster's New International Dictionary, which defines it as "that which busies or engages time, attention or labor as a principal serious concern or interest; any particular occupation or employment habitually engaged in specially for livelihood or gain." The Court also cited judicial pronouncements from Words and Phrases, including the principle that "an enterprise not conducted as a means of livelihood or for profit does not come within the ordinary meaning of the terms, 'business, trade or industry.'" The Court concluded that the plain ordinary meaning of "business" is restricted to activities or affairs where profit is the purpose or livelihood is the motive. The term "business" being used without any qualification in Section 193 in relation to Section 178 should therefore be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood.
• Effect of Administrative Construction: The Court rejected the petitioner's contention that the 1921 administrative ruling had gained legislative approval through reenactment. The Court noted that while there was admittedly a ruling on this point in 1921, there was no showing that such had been a long-continued practice. More importantly, any administrative construction must be within the ambit of, and must be consistent with, the Revised Administrative Code and the Tax Code. The Court cited the rule that where the statute is unambiguous, an administrative construction is unwarranted, and no construction may be made to restrict or enlarge the meaning of an Act. The Court found that Section 193 of the present Tax Code is a verbatim copy of Section 1464 of the Revised Administrative Code, and the policy of taxing persons engaged in business has not suffered any change. In the absence of a showing that the legislative body had been apprised of the 1921 ruling, what gained legislative approval through reenactment is the policy behind the provision of taxing persons engaged in business, not the alleged practice following the administrative ruling of 1921.
• Statutory Definitions: The Court addressed the petitioner's argument that emphasis should be placed on the phrases "retail liquor dealers," "retail dealers in fermented liquors," and "retail tobacco dealers" as defined in Section 194. The Court held that these definitions must be given weight, but the phrases are part and parcel of the provisions contained not only in Section 193 but also in Section 178 and other parts of the Tax Code, all of which must be given effect in their entirety as a harmonious, coordinated, and integrated unit. When the phrases are construed in the light of the context of the whole Tax Code, it becomes crystal clear that the "retail liquor dealers," "retail dealers in fermented liquors," and "retail tobacco dealers" alluded to in Section 193 are those engaged in "business," not fraternal, civic, non-stock, non-profit organizations like the respondent Lodge.
• Applicability of American Authorities: The Court rejected the petitioner's argument that the American authorities relied upon by the Court of Tax Appeals refer to the exercise of police power, not taxation. The Court held that the distinction enhances, instead of detracting from, the weight of said decisions as precedents. The police power is, in general, broader and subject to less restrictions than the power to tax. While it may be advisable to require a license for some activities undertaken by so-called "clubs" to prevent evasion of laws, a tax is a burden and will not be deemed imposed upon fraternal, civic, non-profit, non-stock organizations unless the intent to the contrary is manifest and patent.

• Definition of "Business" for Tax Purposes — The term "business" as used in Section 193 of the Tax Code, in relation to Section 178, must be construed in its plain and ordinary meaning, restricted to activities or affairs where profit is the purpose or livelihood is the motive. An enterprise not conducted as a means of livelihood or for profit does not come within the ordinary meaning of the terms "business, trade or industry." The Court applied this doctrine to hold that a fraternal, civic, non-stock, non-profit organization selling liquor and tobacco only to its members and guests at prices sufficient merely to cover operational expenses is not engaged in the "business" of selling such articles.
• Administrative Construction Must Be Consistent with the Statute — Where the statute is unambiguous, an administrative construction is unwarranted, and no construction may be made to restrict or enlarge the meaning of an Act. An administrative ruling that is inconsistent with the clear language of the law cannot be sustained, and no amount of trenchant adherence to an established practice may justify its continued application where it is clear and manifest that the same is not in consonance with the policy of the legislature as defined by law. The Court applied this doctrine to reject the Bureau of Internal Revenue's 1921 ruling that clubs selling exclusively to members should pay the privilege tax.
• Legislative Reenactment of Administrative Construction — For an administrative construction to gain approval by legislative reenactment, there must be a showing that the legislative body had been apprised of the administrative ruling. In the absence of such showing, what gains legislative approval through reenactment is the policy behind the statutory provision, not the alleged administrative practice. The Court applied this doctrine to hold that the reenactment of Section 1464 of the Revised Administrative Code as Section 193 of the Tax Code approved the policy of taxing persons engaged in business, not the 1921 administrative ruling.
• Taxes Are Not Deemed Imposed Absent Manifest Intent — A tax is a burden and, as such, it will not be deemed imposed upon fraternal, civic, non-profit, non-stock organizations unless the intent to the contrary is manifest and patent. The Court applied this doctrine in affirming that the Lodge, being a non-profit organization, should not be held liable for privilege taxes absent a clear legislative intent to tax such organizations.

• "The privilege taxes prescribed in section 193 of the Tax Code in relation to section 178 of the same, are to be imposed or classified therein for 'business' purposes. This evident intention of the law becomes more palpable when we take into consideration the facts that the drafters of our Tax Code had grouped the aforequoted provisions of law under one general division of the Tax Code headed as 'Title V, Privilege Taxes on Business and occupation.'" — This passage establishes the Court's foundational interpretation that the privilege taxes under Section 193 are imposed only for business purposes, which is the ratio decidendi of the case.
• "From the foregoing definitions, it is evident that the plain ordinary meaning of 'business' is restricted to activities or affairs where profit is the purpose, or livelihood is the motive. The term 'business' being used without any qualification in section 193 of the Tax Code in relation to section 178 of the same, should therefore be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood." — This passage defines the controlling doctrine on the meaning of "business" for purposes of the privilege tax provisions of the Tax Code.
• "In the absence of a showing that the legislative body had been apprised of the aforesaid ruling, what has gained legislative approval thru reenactment is, we believe, the policy behind the above-mentioned provision of the Revised Administrative Code of taxing persons engaged in business and not the alleged practice following the administrative ruling of 1921. We believe that no amount of trenchant adherence to an established practice may justify its continued application where it is clear and manifest that the same is not in consonance with the policy of the legislature as defined by law." — This passage articulates the Court's rejection of the petitioner's argument on legislative reenactment of the administrative ruling and establishes the principle that administrative constructions must be consistent with the statute.
• "Upon the other hand, a tax is a burden and, as such, it will not be deemed imposed upon fraternal, civic, non-profit, non-stock organizations, unless the intent to the contrary is manifest and patent." — This passage states the principle that taxes are not presumed to be imposed on non-profit organizations absent clear legislative intent, which is frequently cited in subsequent jurisprudence.

• State vs. University Club, 130 P. 468, 470; 35 Nev. 475; 44 L.R.A., N.S. 1026 — Cited as persuasive authority for the proposition that a bona fide social club that disposes of liquors at its clubhouse to members and their guests at a fixed charge as incident to the general purposes of the organization is not required to take out a license, the term "business" in such statute meaning business in the trade or commercial sense.
• Barden vs. Montana Club, 25 P. 1042, 10 Mont. 330, 11 L.R.A. 593 — Cited as persuasive authority for the proposition that a social club, not organized for the purpose of evading the liquor laws, which furnishes its members with liquors and refreshments without profit to itself, is not a retail liquor dealer within the statute imposing a license tax.
• Tennessee Club of Memphis vs. Dwyer, 79 Tenn. (11 Lea) 452, 461, 47 Am. Rep. 298 — Cited as persuasive authority for the proposition that a statute authorizing taxation of liquor dealers does not include a social club that keeps a small stock of liquor, with members paying for drinks as taken but no profit being made on such sales.
• U.S. vs. Missouri P.R. Co., 278 U.S. 269, 73 L. Ed. 322 — Cited as controlling authority for the rule that where the statute is unambiguous, an administrative construction is unwarranted.
• Blatt vs. U.S., 305 U.S. 267, 83 L. Ed. 167 — Cited as controlling authority for the rule that no construction may be made to restrict or enlarge the meaning of an Act.

• Section 178, National Internal Revenue Code — Provides that a privilege tax must be paid before any business or occupation specified can be lawfully begun or pursued, and that the tax on business is payable for every separate or distinct establishment or place where the business subject to the tax is conducted. The Court applied this provision to hold that the privilege taxes are imposed only on those engaged in "business."
• Section 193, subsections (i), (k), and (n), National Internal Revenue Code — Imposes fixed taxes on retail liquor dealers (P100.00), retail dealers in fermented liquors (P50.00), and retail tobacco dealers (P16.00). The Court interpreted these provisions in relation to Section 178 to require that the taxpayer be engaged in the "business" of selling these articles.
• Section 194, National Internal Revenue Code — Defines "retail liquor dealer," "retail dealer in fermented liquors," and "tobacco dealer." The Court held that these definitions must be construed in the light of the context of the whole Tax Code, of which they are integral parts, and that the phrases refer to those engaged in "business."
• Section 1464, Revised Administrative Code — The predecessor provision of Section 193 of the Tax Code. The Court examined this provision in connection with Section 1453 of the same Code and found that Section 193 of the present Tax Code is a verbatim copy of the aforementioned provisions, and the policy of taxing persons engaged in business has not suffered any change.

Paras, C.J., Bengzon, Padilla, Montemayor, Bautista Angelo, Endencia, and Barrera, JJ., concurred.

N/A — No dissenting opinions were noted in the case text.