Commissioner of Internal Revenue vs. De La Salle University, Inc.

Non-stock, non-profit educational institutions are constitutionally exempt from taxes and duties on all their revenues and assets, regardless of source, provided they are used actually, directly, and exclusively for educational purposes; the last paragraph of Section 30 of the Tax Code, which imposes tax on income from properties or for-profit activities regardless of disposition, is unconstitutional as applied to such institutions.

De La Salle University, Inc. (DLSU), a non-stock, non-profit educational institution, was assessed by the Bureau of Internal Revenue (BIR) for deficiency income tax, value-added tax (VAT), and documentary stamp tax (DST) for fiscal years 2001, 2002, and 2003 based on rental income from concessionaires operating within its campus. The assessment stemmed from a Letter of Authority (LOA) issued by the BIR covering "Fiscal Year Ending 2003 and Unverified Prior Years." DLSU contested the assessment before the CTA, claiming exemption under Article XIV, Section 4(3) of the 1987 Constitution and arguing that its rental income was used actually, directly, and exclusively for educational purposes, particularly for the construction of a Sports Complex and other capital projects.

• In 2004, the BIR issued LOA No. 2794 to DLSU authorizing examination of books for "Fiscal Year Ending 2003 and Unverified Prior Years."
• On May 19, 2004, the BIR issued a Preliminary Assessment Notice to DLSU.
• On August 18, 2004, the BIR issued a Formal Letter of Demand assessing DLSU P17,303,001.12 for deficiency income tax on rental earnings from restaurants/canteens and bookstores, VAT on business income, and DST on loans and lease contracts for taxable years 2001, 2002, and 2003.
• DLSU protested the assessment, invoking Article XIV, Section 4(3) of the Constitution, which exempts from taxes all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes.
• DLSU submitted supplemental evidence showing rental income was used to pay loans for the construction of the Physical Education-Sports Complex and deposited to the Capital Fund-Capital Projects Account (CF-CPA).
• The Independent Certified Public Accountant (ICPA) found that DLSU substantiated disbursements of P6,259,078.30 from the CF-CPA Account for fiscal year 2003, but total disbursements per subsidiary ledger amounted to P23,463,543.02.
• DLSU claimed that some disbursement vouchers were misplaced due to migration to new accounting software in 2011, and submitted secondary evidence (downloaded copies from accounting software) to prove the disbursements were for educational purposes.

• DLSU's rental income is taxable regardless of use or disposition, citing Section 30(H) of the Tax Code which taxes income from properties or for-profit activities regardless of disposition.
• Article XIV, Section 4(3) must be harmonized with Section 30(H) of the Tax Code, and the constitutional exemption applies only to property tax, not income tax.
• DLSU failed to prove payment of DST and is not qualified to use the On-Line Electronic DST Imprinting Machine.
• The CTA erred in admitting DLSU's supplemental evidence offered only after the unfavorable original decision, which effectively reopened the case for trial.
• The LOA is valid for all years assessed because the issue of its validity was not raised during administrative proceedings.
• DLSU is estopped from questioning the LOA's validity as it failed to raise this issue in both administrative and judicial proceedings before the CTA Division.

• Article XIV, Section 4(3) of the Constitution grants tax exemption on all revenues and assets used actually, directly, and exclusively for educational purposes, and this constitutional grant is not subject to limitations by law.
• Section 30(H) of the Tax Code cannot amend the Constitution; the last paragraph of Section 30 is unconstitutional as applied to non-stock, non-profit educational institutions because it conflicts with the constitutional exemption.
• The LOA covering "unverified prior years" is entirely void under RMO No. 43-90, which prohibits such practice and requires specific indication of taxable periods.
• The CTA should have appreciated DLSU's evidence similarly to how it appreciated Ateneo's evidence in a separate case (principle of uniformity in taxation).
• DLSU proved that its rental income was used actually, directly, and exclusively for educational purposes through fund accounting and disbursement records.
• DLSU proved DST payment through its bank's on-line imprinting machine, which is allowed under RR No. 15-2001, and in any case, educational institutions are constitutionally exempt from DST.
• The Commissioner failed to timely object to the supplemental evidence despite notice, rendering the objection waived.

• Procedural Issues:
  • Whether the CTA correctly admitted DLSU's supplemental pieces of evidence offered during motion for reconsideration.
  • Whether the CTA's appreciation of evidence may be disturbed by the Supreme Court.
• Substantive Issues:
  • Whether DLSU's income and revenues proved to have been used actually, directly and exclusively for educational purposes are exempt from duties and taxes.
  • Whether the entire assessment should be voided because of the defective LOA covering "unverified prior years."
  • Whether DLSU is liable for deficiency DST on its loan transactions.

• Procedural:
  • The CTA correctly admitted DLSU's supplemental evidence because the Commissioner failed to timely object despite notice, and the CTA is not strictly governed by technical rules of evidence under Republic Act No. 1125.
  • The CTA's appreciation of evidence is generally binding and conclusive unless the CTA is shown to have manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion.
• Substantive:
  • The income, revenues, and assets of non-stock, non-profit educational institutions proved to have been used actually, directly and exclusively for educational purposes are exempt from duties and taxes. The last paragraph of Section 30 of the Tax Code is declared without force and effect insofar as it subjects to tax the income and revenues of such institutions used for educational purposes, being contrary to Article XIV, Section 4(3) of the Constitution.
  • The LOA issued to DLSU is not entirely void; the assessment for taxable year 2003 (specified in the LOA) is valid, but assessments for 2001 and 2002 are void for being unspecified "unverified prior years" in violation of RMO No. 43-90.
  • The tax base for deficiency income tax and VAT for 2003 is modified to P343,576.70, representing the portion of rental income not proven to have been used for educational purposes (P6,602,655.00 deposited to CF-CPA minus P6,259,078.30 substantiated disbursements), rejecting the CTA's proration method.
  • DLSU proved payment of DST through its bank's on-line imprinting machine, which is allowed under Section 200(D) of the Tax Code and RR No. 15-2001, except for an unpaid balance of P13,265.48.

• Constitutional Supremacy — The Constitution is the supreme law of the land; any law contrary to it is void. The Court declared the last paragraph of Section 30 of the Tax Code without force and effect as applied to non-stock, non-profit educational institutions because it conflicts with Article XIV, Section 4(3) of the Constitution.
• Actual, Direct and Exclusive Use Test — For non-stock, non-profit educational institutions, tax exemption applies to all revenues and assets used actually, directly, and exclusively for educational purposes, regardless of the source of the revenue.
• Distinction Between Revenues and Assets — Revenues (subject to income tax, VAT, and local business tax) and assets (subject to real property tax) are treated separately; exemption depends on the actual use of the specific item (revenue or asset) for educational purposes, not the source.
• Hierarchy of Tax Exemptions — Non-stock, non-profit educational institutions enjoy broader exemption than proprietary educational institutions; the former's exemption is conditioned only on actual use for educational purposes, while the latter's exemption may be subject to limitations imposed by law under Section 27(B) of the Tax Code.

• "The last paragraph of Section 30 of the Tax Code is without force and effect with respect to non-stock, non-profit educational institutions, provided, that the non-stock, non-profit educational institutions prove that its assets and revenues are used actually, directly and exclusively for educational purposes."
• "The tax exemption granted by the Constitution to non-stock, non-profit educational institutions, unlike the exemption that may be availed of by proprietary educational institutions, is not subject to limitations imposed by law."
• "The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is not without significance."
• "To be clear, proving the actual use of the taxable item will result in an exemption, but the specific tax from which the entity shall be exempted from shall depend on whether the item is an item of revenue or asset."
• "The tax exemption was seen as beneficial to students who may otherwise be charged unreasonable tuition fees if not for the tax exemption extended to all revenues and assets of non-stock, non-profit educational institutions."

• Commissioner of Internal Revenue v. YMCA — Distinguished; held that YMCA (a charitable institution) was exempt only from property tax under Article VI, Section 28(3), not income tax, and that "educational institution" refers to the school system. The Court adopted YMCA's requisites for availing tax exemption under Article XIV, Section 4(3): (1) taxpayer falls under non-stock, non-profit educational institution; and (2) income is used actually, directly and exclusively for educational purposes.
• Ateneo de Manila University v. Commissioner of Internal Revenue — Distinguished; involved different factual settings and issues (whether educational institution must own/operate commercial establishments to avail exemption).
• Abra Valley College, Inc. v. Aquino — Cited for the test of exemption from taxation based on use of property for educational purposes; facilities incidental to and reasonably necessary for educational purposes are exempt.
• Commissioner of Internal Revenue v. Sony Philippines, Inc. — Cited regarding the validity of LOAs and the prohibition against "unverified prior years" under RMO No. 43-90.
• BPI-Family Savings Bank v. Court of Appeals — Cited for the rule that the CTA is not governed strictly by technical rules of evidence and may admit evidence attached to motions for reconsideration.
• Filinvest Development Corporation v. Commissioner of Internal Revenue — Cited for liberality in admitting evidence in tax cases before the CTA.
• Commissioner of Internal Revenue v. PERF Realty Corporation — Cited for liberality in admitting evidence in tax cases before the CTA.

• Article XIV, Section 4(3) of the 1987 Constitution — Grants tax exemption to all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes.
• Article VI, Section 28(3) of the 1987 Constitution — Distinguished; grants exemption only to assets (lands, buildings, improvements) of charitable institutions, churches, etc. used for religious, charitable, or educational purposes.
• Section 30 of the National Internal Revenue Code (Tax Code) — Last paragraph declared without force and effect as applied to non-stock, non-profit educational institutions; subjects to tax income of exempt organizations from properties or activities for profit regardless of disposition.
• Section 27(B) of the Tax Code — Cited regarding the tax treatment of proprietary educational institutions (10% rate subject to limitations on unrelated trade or business).
• Section 200(D) of the Tax Code — Allows payment of DST through imprinting stamps via documentary stamp metering machine or on-line electronic DST imprinting machine.
• Revenue Memorandum Order (RMO) No. 43-90 — Prohibits issuance of LOAs covering "unverified prior years" without specifying the periods; requires specific indication of taxable periods if more than one year is audited.
• Revenue Regulations (RR) No. 15-2001 — Implements Section 200(D) regarding DST imprinting machines.
• Revenue Regulations (RR) No. 9-2000 — Cited regarding classes of taxpayers allowed to use On-Line Electronic DST Imprinting Machine (includes banks).

• Justice Leonen — Argued that: (1) LOA No. 2794 is entirely void for covering "unverified prior years" in contravention of RMO No. 43-90, and all assessments based thereon should be set aside to protect taxpayers from undue intrusion and harassment; (2) the CTA erred in failing to consider DLSU's secondary evidence (Exhibits XX, YY, ZZ, AAA) which proved that all rental income was used for educational purposes; (3) DLSU should not be liable for any deficiency income tax and VAT because it sufficiently proved actual, direct, and exclusive use for educational purposes through fund accounting and secondary evidence.