Primary Holding

The Supreme Court affirmed the Court of Appeals' decision in part, declaring that MERALCO's electric facilities are subject to real property tax under the Local Government Code. However, it nullified the 1997 appraisal and assessment by the City Assessor of Lucena due to violation of MERALCO's right to due process and ordered a new assessment to be conducted in accordance with the Local Government Code.

Background

MERALCO had been operating in Lucena City since 1922 under various franchises, some of which provided tax exemptions on certain electric facilities. Lucena City began assessing real property tax on MERALCO's electric facilities starting 1985. MERALCO contested these assessments, arguing that its facilities were exempt under its franchise and were personal property, not real property.

Facts

• 1. MERALCO, a public utility, operates in Lucena City under various franchises. In 1989, the City Assessor of Lucena issued Tax Declaration No. 019-6500, classifying MERALCO's transformers, electric posts, transmission lines, insulators, and electric meters as capital investment and subject to real property tax from 1985. MERALCO initially claimed exemption based on its franchise and argued the facilities were personal property. Later, assessments were issued for subsequent years up to 1997. MERALCO contested the assessments, particularly the 1997 assessment, arguing procedural violations in the appraisal and assessment process.

Arguments of the Petitioners

• 1. MERALCO’s electric facilities are not real property but personal property, aligning with previous rulings and Article 415 of the Civil Code.
• 2. The 1991 CBAA decision classifying similar facilities as personal property is binding.
• 3. Electric posts are not exclusively used by MERALCO, as other entities also use them.
• 4. The 1997 assessment was invalid due to procedural deficiencies: lump-sum valuation, lack of inventory, and insufficient notice, violating due process.
• 5. Assessment should only take effect prospectively from January 1, 1998, not retroactively to 1992.
• 6. Penalties and interests should not be imposed due to MERALCO's good faith belief in the exemption and improper assessment.

Arguments of the Respondents

• 1. MERALCO is obligated to pay real property tax, as the Local Government Code removed prior exemptions.
• 2. The appeal should not suspend tax collection; MERALCO should have paid under protest.
• 3. Under the Local Government Code, MERALCO's facilities are considered "machinery" and thus real property subject to tax.
• 4. The 1997 assessment retroacting to 1992 is valid and within the 10-year limit of the Local Government Code.
• 5. Penalties and interests are appropriate due to non-payment.

Issues

• 1. Are MERALCO's transformers, electric posts, transmission lines, insulators, and electric meters considered real property subject to real property tax under the Local Government Code?
• 2. Was the 1997 assessment of real property tax on MERALCO's electric facilities by the City Assessor of Lucena valid and in accordance with the Local Government Code, particularly regarding appraisal, assessment, and notice requirements, thereby respecting MERALCO’s right to due process?
• 3. Is MERALCO entitled to tax exemption on these facilities based on its franchise?
• 4. Should the assessment be applied retroactively and should penalties and interests be imposed?

Ruling

• 1. The Supreme Court ruled that under the Local Government Code, MERALCO's electric facilities are considered "machinery" and are subject to real property tax. The Court acknowledged the withdrawal of previous tax exemptions by the Local Government Code. However, it found the 1997 assessment invalid because the City Assessor failed to conduct a proper appraisal and assessment as mandated by Sections 224 and 225 of the Local Government Code. The notice was also deemed insufficient and did not provide the necessary details for MERALCO to understand the assessment and properly contest it, thus violating due process. The Court ordered a new assessment, conducted properly, but upheld the taxability of the facilities from 1992 onwards.

Doctrines

• 1. Lex specialis derogat generali: A special law prevails over a general law, applied to prioritize the Local Government Code (special law on local taxation) over the Civil Code (general law on property classification) for real property taxation purposes.
• 2. Expressio unius est exclusio alterius: The express mention of one thing excludes others. Applied to Section 234 of the Local Government Code, stating that exemptions are limited to those explicitly listed, thus withdrawing previous exemptions not listed.
• 3. Due Process in Taxation: Tax assessments must be procedurally fair, requiring proper appraisal, assessment, and notice to taxpayers. Arbitrary assessments violate due process.
• 4. Payment under Protest: Section 252 of the Local Government Code requires payment under protest as a condition for entertaining tax appeals, but substantial compliance can be achieved through a surety bond.

Key Excerpts

• 1. "The power to tax is primarily vested in Congress. However, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to [a] direct authority conferred by Section 5, Article X of the Constitution."
• 2. "Taxes are the lifeblood of the government," but "the power to tax has its limits, in spite of all its plenitude. Even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure."

Precedents Cited

• 1. Board of Assessment Appeals v. Manila Electric Company (1964 MERALCO case): Cited by MERALCO and the LBAA/CBAA initially to argue that electric posts are personal property and exempt, but distinguished in the present case due to changes in law (Local Government Code) and the definition of machinery.
• 2. City Government of San Pablo, Laguna vs. Reyes: Cited to support the withdrawal of tax exemptions under the Local Government Code.
• 3. Caltex (Phil) Inc. vs. Central Board of Assessment Appeals: Cited to show that improvements on land are commonly taxed as realty even if they might be considered personalty for other purposes.
• 4. Camp John Hay Development Corporation v. Central Board of Assessment Appeals: Cited to justify the acceptance of a surety bond as substantial compliance with the payment under protest requirement.
• 5. Leveriza v. Intermediate Appellate Court and Vinzons-Chato v. Fortune Tobacco Corporation: Cited to explain the principle of lex specialis derogat generali.
• 6. Manila Electric Company v. Barlis: Cited for the requirements of a valid notice of assessment.
• 7. Commissioner of Internal Revenue v. United Salvage and Towage (Phils.), Inc.: Cited regarding due process in tax assessments.
• 8. Disomangcop v. Secretary of the Department of Public Works and Highways Simeon A. Datumanong: Cited to reinforce the doctrine of lex specialis derogat generali.
• 9. Philippine Rural Electric Cooperatives Association, Inc. v. The Secretary, Department of Interior and Local Government and Mactan Cebu International Airport Authority v. Marcos: Cited for the objective of the Local Government Code to grant autonomy to local governments and broaden the tax base.
• 10. National Power Corporation v. City of Cabanatuan and Digital Telecommunications Philippines, Inc. v. City Government ofBatangas: Cited generally for principles of statutory construction related to tax exemptions and changes in legislation.
• 11. Yamane v. BA Lepanto Condominium Corporation and Cagayan Robina Sugar Milling Company v. Court of Appeals: Cited concerning requirements for valid notices and presumptions in tax assessments.

Statutory and Constitutional Provisions

• 1. Rule 45 of the Rules of Court: Petition for Review on Certiorari.
• 2. Rule 43 of the Rules of Court: Petition for Review to the Court of Appeals.
• 3. Article 415 of the Civil Code: Definition of immovable property.
• 4. Section 193, Section 199(o), Section 202, Section 204, Section 221, Section 222, Section 223, Section 224, Section 225, Section 231, Section 232, Section 234, Section 252, Section 534(f) of the Local Government Code of 1991 (R.A. 7160): Provisions related to tax exemptions, definition of machinery, assessment procedures, payment under protest, and repealing clause.
• 5. Presidential Decree No. 551: Presidential Decree pertaining to tax exemptions, repealed by Local Government Code.
• 6. Republic Act No. 9209: Republic Act granting franchise to MERALCO, silent on tax exemptions.
• 7. Republic Act No. 7160: Local Government Code of 1991.
• 8. Republic Act No. 9136 (Electric Power Industry Reform Act of 2001): Mentioned in relation to franchise and electricity distribution.
• 9. Commonwealth Act No. 470 (Assessment Law): Previous law on real property tax.
• 10. Presidential Decree No. 464 (Real Property Tax Code): Previous law on real property tax, repealed by Local Government Code.
• 11. Ordinance No. 44 dated March 24, 1903 of the Municipal Board of Manila: Original franchise of MERALCO.
• 12. Resolution No. 36 dated May 15, 1922, Resolution No. 108 dated July 1, 1957, and Resolution No. 2679 dated June 13, 1972 of the Municipal Council/Board of Lucena City: Franchises granted to MERALCO in Lucena City.
• 13. Certificate of Franchise dated October 28, 1993 issued by the National Electrification Commission: Subsequent franchise of MERALCO.
• 14. Article 304 of the Rules and Regulations Implementing the Local Government Code of 1991: Authority of local assessors to take evidence.