Demaala vs. Commission on Audit

Local government units may impose an additional levy for the Special Education Fund at a rate less than one percent (1%), as Section 235 of the Local Government Code uses permissive language that must be construed in favor of local fiscal autonomy under Article X, Section 5 of the 1987 Constitution; accordingly, local officials acting in good faith pursuant to a presumptively valid ordinance setting such rate are not personally liable for the "deficiency" relative to the statutory ceiling.

The Sangguniang Panlalawigan of Palawan enacted Provincial Ordinance No. 332-A, Series of 1995, which adopted the Provincial Assessment Code. Chapter 5, Section 48 of this Ordinance provided for an additional levy on real property tax for the Special Education Fund at the rate of 0.5% of the assessed value, rather than the 1% rate found in Section 235 of Republic Act No. 7160 (Local Government Code).

• The Provincial Ordinance: In 1995, the Sangguniang Panlalawigan of Palawan enacted Provincial Ordinance No. 332-A, which imposed an annual tax for the Special Education Fund (SEF) at the rate of one-half percent (0.5%) of the assessed value of real property.
• Implementation by Municipality: During her term as Mayor of Narra, Palawan, Lucena D. Demaala caused the implementation of Section 48 of the Ordinance through the municipal treasurer, collecting the SEF at the 0.5% rate from real property owners within the municipality.
• Audit Observation: On August 7, 2003, Commission on Audit (COA) Audit Team Leader Juanito A. Nostratis issued Audit Observation Memorandum (AOM) No. 03-005, questioning the 0.5% collection rate and asserting that Section 235 of Republic Act No. 7160 (Local Government Code) mandated a 1% rate.
• Notice of Charge: On August 30, 2004, COA Regional Cluster Director Rodolfo C. Sy issued Notice of Charge (NC) No. 2004-04-101 against Demaala, the municipal treasurer, and all SEF payors, holding them liable for ₱1,125,416.56 representing the alleged deficiency between the 0.5% collected and the 1% prescribed by the Local Government Code.
• Administrative Appeals: Demaala, representing the Municipality of Narra, filed a Motion for Reconsideration on December 2, 2004, which was denied on March 9, 2005. She then appealed to the COA Legal and Adjudication Office (LAO), which denied the appeal in Local Decision No. 2006-056 dated April 19, 2006. A Petition for Review to the COA proper resulted in Decision No. 2008-087 dated September 22, 2008, which affirmed the LAO decision with modification to include former Vice Governor Joel T. Reyes and the members of the Sangguniang Panlalawigan as jointly and severally liable. Demaala's Motion for Reconsideration was denied in Resolution No. 2011-083 dated November 16, 2011, prompting the filing of the Petition for Certiorari with the Supreme Court.

• Permissive Nature of Section 235: Petitioner contended that the word "may" in Section 235 of the Local Government Code grants local government units discretion not only to impose the SEF levy but also to set the rate at less than 1%, arguing that the statutory rate represents a ceiling rather than a mandatory floor.
• Local Autonomy: The imposition of a 0.5% rate was justified by the constitutional policy of local autonomy under Article X, Section 5 of the 1987 Constitution, which empowers local government units to create their own sources of revenue and allocates taxes exclusively to them.
• Good Faith and Presumption of Validity: Petitioner maintained that as Mayor, she merely implemented a provincial ordinance that was presumptively valid; she could not be held personally liable for enforcing legislation that had not been judicially declared invalid.
• Distinction from Salalima: Petitioner distinguished her case from Salalima v. Guingona, arguing that the latter involved officials who actively authored an invalid ordinance and committed technical malversation, whereas she merely enforced existing legislation.

• Mandatory 1% Rate: Respondent argued that Section 235 fixes the SEF rate at 1%, and that the discretion granted by the word "may" extends only to the decision whether to collect the levy, not to the rate at which it is collected.
• Personal Liability of Officials: Citing Salalima v. Guingona, respondent asserted that local officials are collectively responsible for fiscal transactions and that Demaala's participation in implementing the reduced rate caused a loss of government income, warranting personal liability.
• Joint and Several Liability: Respondent maintained that the members of the Sangguniang Panlalawigan who enacted the ordinance should be held jointly and severally liable with the implementing officials.

• Validity of the 0.5% SEF Rate: Whether respondent Commission on Audit committed grave abuse of discretion in holding that the Municipality of Narra's collection of SEF at 0.5% constituted a deficiency, despite Section 235 of the Local Government Code being permissive in nature.
• Personal Liability of Petitioner: Whether respondent committed grave abuse of discretion in holding petitioner personally liable for the alleged deficiency in SEF collections.

• Validity of the 0.5% SEF Rate: Section 235's use of "may levy and collect an annual tax of one percent (1%)" is permissive and discretionary, allowing local government units to set a rate lower than 1%. The 1% rate constitutes a maximum ceiling, not a mandatory fixed rate. Any ambiguity in the statute must be resolved in favor of local fiscal autonomy pursuant to Article X, Section 5 of the 1987 Constitution. The Sangguniang Panlalawigan of Palawan acted within its authority in enacting Provincial Ordinance No. 332-A.
• Personal Liability of Petitioner: Personal liability cannot attach to a local official who acts in good faith pursuant to a presumptively valid ordinance. Demaala merely implemented the provincial ordinance; she was not its author and did not participate in the legislative enactment. Unlike Salalima, which involved active malversation and the drafting of an invalid ordinance, this case involves enforcement of legislation presumed valid under established legal principles.

• Local Fiscal Autonomy — Local government units possess the power to create their own sources of revenue and to allocate their resources in accordance with their own priorities, subject only to guidelines and limitations provided by Congress. This autonomy includes the flexibility to set tax rates within statutory bounds according to local needs and capacities, ensuring that high rates do not disincentivize commerce in less affluent constituencies.
• Presumption of Validity of Ordinances — Laws and local ordinances are presumed valid unless and until courts declare the contrary in clear and unequivocal terms. Local officials enforcing such ordinances are presumed to act in good faith and with regularity, shielding them from personal liability for deficiencies arising from the enforcement of legislation later found to be inconsistent with higher law.
• Resolution of Doubts in Favor of Local Autonomy — Where a law is capable of two interpretations, one centralizing power and the other beneficial to local autonomy, the scales must be weighed in favor of autonomy. This principle modifies the traditional rule of strict construction against the taxing power of municipal corporations.

• "Setting the rate of the additional levy for the special education fund at less than 1% is within the taxing power of local government units. It is consistent with the guiding constitutional principle of local autonomy."
• "Section 235’s specified rate of 1% is a maximum rate rather than an immutable edict."
• "It is basic that laws and local ordinances are 'presumed to be valid unless and until the courts declare the contrary in clear and unequivocal terms.' Thus, the concerned officials of the Municipality of Narra, Palawan must be deemed to have conducted themselves in good faith and with regularity when they acted pursuant to Chapter 5, Section 48 of Provincial Ordinance No. 332-A, Series of 1995..."
• "Where a law is capable of two interpretations, one in favor of centralized power in Malacañang and the other beneficial to local autonomy, the scales must be weighed in favor of autonomy."

• Icard v. City Council of Baguio, 83 Phil. 870 (1949) — Cited for the traditional rule that municipal corporations have no inherent power of taxation and that doubts must be resolved against the municipality; distinguished in light of the 1987 Constitution's local autonomy provisions.
• City Government of San Pablo v. Reyes, 364 Phil. 842 (1999) — Followed for the principle that doubts in interpreting statutory provisions on municipal fiscal powers must be resolved in favor of municipal corporations.
• San Juan v. Civil Service Commission, 273 Phil. 271 (1991) — Followed for the directive that where a law is capable of two interpretations, the scales must be weighed in favor of local autonomy.
• Pimentel v. Aguirre, 391 Phil. 84 (2000) — Cited for the definition of fiscal autonomy as the power to create one's own sources of revenue and allocate resources according to local priorities.
• Salalima v. Guingona, 326 Phil. 847 (1996) — Distinguished; involved technical malversation and the active participation of officials in drafting and implementing an invalid ordinance that denied beneficiaries their rightful shares, unlike the present case where petitioner merely enforced a presumptively valid ordinance.

• Article X, Section 5, 1987 Constitution — Grants local government units the power to create their own sources of revenues and to levy taxes, fees, and charges subject to Congressional guidelines, consistent with the basic policy of local autonomy; cited as the constitutional basis for interpreting Section 235 of the Local Government Code permissively.
• Section 235, Republic Act No. 7160 (Local Government Code) — Provides that provinces, cities, or municipalities within the Metropolitan Manila Area "may levy and collect an annual tax of one percent (1%)" for the Special Education Fund; interpreted by the Court as setting a maximum rate rather than a mandatory fixed rate.
• Section 272, Republic Act No. 7160 (Local Government Code) — Discussed in relation to Salalima regarding the sharing of SEF proceeds between provincial and municipal school boards; distinguished from the present issue of rate imposition.

Maria Lourdes P.A. Sereno (Chief Justice), Antonio T. Carpio, Presbitero J. Velasco, Jr., Teresita J. Leonardo-De Castro, Arturo D. Brion, Diosdado M. Peralta, Lucas P. Bersamin, Mariano C. Del Castillo, Martin S. Villarama, Jr., Jose Portugal Perez, Jose Catral Mendoza, Bienvenido L. Reyes, Estela M. Perlas-Bernabe, Francis H. Jardeleza.