G.R. Nos.

L-49839-46 April 26, 1991

JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,

vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROÑO, in their capacities as appointed
and Acting Members of the CENTRAL BOARD OF ASSESSMENT APPEALS; TERESITA H.
NOBLEJAS, ROMULO M. DEL ROSARIO, RAUL C. FLORES, in their capacities as appointed
and Acting Members of the BOARD OF ASSESSMENT APPEALS of Manila; and NICOLAS
CATIIL in his capacity as City Assessor of Manila, respondents.

Barcelona, Perlas, Joven & Academia Law Offices for petitioners.

PARAS, J.:

This is a petition for review on certiorari to reverse the June 10, 1977 decision of the Central
Board of Assessment Appeals1 in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes, Edmundo
Reyes, et al. v. Board of Assessment Appeals of Manila and City Assessor of Manila" which
affirmed the March 29, 1976 decision of the Board of Tax Assessment Appeals2 in BTAA Cases
Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose Reyes, et al. v. City Assessor of Manila" and
"Edmundo Reyes and Milagros Reyes v. City Assessor of Manila" upholding the classification
and assessments made by the City Assessor of Manila.

The facts of the case are as follows:

Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated
in Tondo and Sta. Cruz Districts, City of Manila, which are leased and entirely occupied as
dwelling sites by tenants. Said tenants were paying monthly rentals not exceeding three
hundred pesos (P300.00) in July, 1971. On July 14, 1971, the National Legislature enacted
Republic Act No. 6359 prohibiting for one year from its effectivity, an increase in monthly rentals
of dwelling units or of lands on which another's dwelling is located, where such rentals do not
exceed three hundred pesos (P300.00) a month but allowing an increase in rent by not more
than 10% thereafter. The said Act also suspended paragraph (1) of Article 1673 of the Civil
Code for two years from its effectivity thereby disallowing the ejectment of lessees upon the
expiration of the usual legal period of lease. On October 12, 1972, Presidential Decree No. 20
amended R.A. No. 6359 by making absolute the prohibition to increase monthly rentals below
P300.00 and by indefinitely suspending the aforementioned provision of the Civil Code,
excepting leases with a definite period. Consequently, the Reyeses, petitioners herein, were
precluded from raising the rentals and from ejecting the tenants. In 1973, respondent City
Assessor of Manila re-classified and reassessed the value of the subject properties based on
the schedule of market values duly reviewed by the Secretary of Finance. The revision, as
expected, entailed an increase in the corresponding tax rates prompting petitioners to file a
Memorandum of Disagreement with the Board of Tax Assessment Appeals. They averred that
the reassessments made were "excessive, unwarranted, inequitable, confiscatory and
unconstitutional" considering that the taxes imposed upon them greatly exceeded the annual
income derived from their properties. They argued that the income approach should have been
used in determining the land values instead of the comparable sales approach which the City
Assessor adopted (Rollo, pp. 9-10-A). The Board of Tax Assessment Appeals, however,
considered the assessments valid, holding thus:

WHEREFORE, and considering that the appellants have failed to submit concrete evidence
which could overcome the presumptive regularity of the classification and assessments appear
to be in accordance with the base schedule of market values and of the base schedule of
building unit values, as approved by the Secretary of Finance, the cases should be, as they are
hereby, upheld.

SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).

The Reyeses appealed to the Central Board of Assessment Appeals.1âwphi1 They submitted,
among others, the summary of the yearly rentals to show the income derived from the
properties. Respondent City Assessor, on the other hand, submitted three (3) deeds of sale
showing the different market values of the real property situated in the same vicinity where the
subject properties of petitioners are located. To better appreciate the locational and physical
features of the land, the Board of Hearing Commissioners conducted an ocular inspection with
the presence of two representatives of the City Assessor prior to the healing of the case. Neither
the owners nor their authorized representatives were present during the said ocular inspection
despite proper notices served them. It was found that certain parcels of land were below street
level and were affected by the tides (Rollo, pp. 24-25).

On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the
dispositive portion of which reads:

WHEREFORE, the appealed decision insofar as the valuation and assessment of the lots
covered by Tax Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844 and PD-3824 is
affirmed.

For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1) PD-266,
the appealed Decision is modified by allowing a 20% reduction in their respective market values
and applying therein the assessment level of 30% to arrive at the corresponding assessed
value.

SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27)

Petitioner's subsequent motion for reconsideration was denied, hence, this petition.

The Reyeses assigned the following error:

THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES APPROACH"
METHOD IN FIXING THE ASSESSED VALUE OF APPELLANTS' PROPERTIES.

The petition is impressed with merit.

The crux of the controversy is in the method used in tax assessment of the properties in
question. Petitioners maintain that the "Income Approach" method would have been more
realistic for in disregarding the effect of the restrictions imposed by P.D. 20 on the market value
of the properties affected, respondent Assessor of the City of Manila unlawfully and unjustifiably
set increased new assessed values at levels so high and successive that the resulting annual
real estate taxes would admittedly exceed the sum total of the yearly rentals paid or payable by
the dweller tenants under P.D. 20. Hence, petitioners protested against the levels of the values
assigned to their properties as revised and increased on the ground that they were arbitrarily
excessive, unwarranted, inequitable, confiscatory and unconstitutional (Rollo, p. 10-A).

On the other hand, while respondent Board of Tax Assessment Appeals admits in its decision
that the income approach is used in determining land values in some vicinities, it maintains that
when income is affected by some sort of price control, the same is rejected in the consideration
and study of land values as in the case of properties affected by the Rent Control Law for they
do not project the true market value in the open market (Rollo, p. 21). Thus, respondents opted
instead for the "Comparable Sales Approach" on the ground that the value estimate of the
properties predicated upon prices paid in actual, market transactions would be a uniform and a
more credible standards to use especially in case of mass appraisal of properties (Ibid.).
Otherwise stated, public respondents would have this Court completely ignore the effects of the
restrictions of P.D. No. 20 on the market value of properties within its coverage. In any event, it
is unquestionable that both the "Comparable Sales Approach" and the "Income Approach" are
generally acceptable methods of appraisal for taxation purposes (The Law on Transfer and
Business Taxation by Hector S. De Leon, 1988 Edition). However, it is conceded that the
propriety of one as against the other would of course depend on several factors. Hence, as
early as 1923 in the case of Army & Navy Club, Manila v. Wenceslao Trinidad, G.R. No. 19297
(44 Phil. 383), it has been stressed that the assessors, in finding the value of the property, have
to consider all the circumstances and elements of value and must exercise a prudent discretion
in reaching conclusions.

Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation must not
only be uniform, but must also be equitable and progressive.

Uniformity has been defined as that principle by which all taxable articles or kinds of property of
the same class shall be taxed at the same rate (Churchill v. Concepcion, 34 Phil. 969 [1916]).

Notably in the 1935 Constitution, there was no mention of the equitable or progressive aspects
of taxation required in the 1973 Charter (Fernando "The Constitution of the Philippines", p. 221,
Second Edition). Thus, the need to examine closely and determine the specific mandate of the
Constitution.
Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is
progressive when its rate goes up depending on the resources of the person affected (Ibid.).

The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of
government. But for all its plenitude the power to tax is not unconfined as there are restrictions.
Adversely effecting as it does property rights, both the due process and equal protection
clauses of the Constitution may properly be invoked to invalidate in appropriate cases a revenue
measure. If it were otherwise, there would be truth to the 1903 dictum of Chief Justice Marshall
that "the power to tax involves the power to destroy." The web or unreality spun from Marshall's
famous dictum was brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to
tax is not the power to destroy while this Court sits. So it is in the Philippines " (Sison, Jr. v.
Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA
439 [1985]).

In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary
that it finds no support in the Constitution. An obvious example is where it can be shown to
amount to confiscation of property. That would be a clear abuse of power (Sison v. Ancheta,
supra).

The taxing power has the authority to make a reasonable and natural classification for purposes
of taxation but the government's act must not be prompted by a spirit of hostility, or at the very
least discrimination that finds no support in reason. It suffices then that the laws operate equally
and uniformly on all persons under similar circumstances or that all persons must be treated in
the same manner, the conditions not being different both in the privileges conferred and the
liabilities imposed (Ibid., p. 662).

Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the first
Fundamental Principle to guide the appraisal and assessment of real property for taxation
purposes is that the property must be "appraised at its current and fair market value."

By no strength of the imagination can the market value of properties covered by P.D. No. 20 be
equated with the market value of properties not so covered. The former has naturally a much
lesser market value in view of the rental restrictions.

Ironically, in the case at bar, not even the factors determinant of the assessed value of subject
properties under the "comparable sales approach" were presented by the public respondents,
namely: (1) that the sale must represent a bonafide arm's length transaction between a willing
seller and a willing buyer and (2) the property must be comparable property (Rollo, p. 27).
Nothing can justify or support their view as it is of judicial notice that for properties covered by
P.D. 20 especially during the time in question, there were hardly any willing buyers. As a
general rule, there were no takers so that there can be no reasonable basis for the conclusion
that these properties were comparable with other residential properties not burdened by P.D.
20. Neither can the given circumstances be nonchalantly dismissed by public respondents as
imposed under distressed conditions clearly implying that the same were merely temporary in
character. At this point in time, the falsity of such premises cannot be more convincingly
demonstrated by the fact that the law has existed for around twenty (20) years with no end to it
in sight.

Verily, taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. However, such collection should be made in accordance with law as
any arbitrariness will negate the very reason for government itself It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real
purpose of taxations, which is the promotion of the common good, may be achieved
(Commissioner of Internal Revenue v. Algue Inc., et al., 158 SCRA 9 [1988]). Consequently, it
stands to reason that petitioners who are burdened by the government by its Rental Freezing
Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice should not now be
penalized by the same government by the imposition of excessive taxes petitioners can ill afford
and eventually result in the forfeiture of their properties.

By the public respondents' own computation the assessment by income approach would
amount to only P10.00 per sq. meter at the time in question.

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of public
respondents are REVERSED and SET ASIDE; and (e) the respondent Board of Assessment
Appeals of Manila and the City Assessor of Manila are ordered to make a new assessment by
the income approach method to guarantee a fairer and more realistic basis of computation
(Rollo, p. 71).

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Feliciano, Gancayco, Padilla,
Bidin, Sarmiento, Griño-Aquino, Medialdea, Regalado and Davide, Jr., JJ., concur.

G.R. Nos. 118498 & 124377 October 12, 1999

FILIPINAS SYNTHETIC FIBER CORPORATION, petitioner,

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

PURISIMA, J.:
Before the Court are two consolidated Petitions for Review on Certiorari under Rule 45 of the
Revised Rules of Court seeking to set aside the Decisions of the Court of Appeals in CA-GR.
SP Nos. 32922 1 and 32022. 2

In G.R. No. 118498, the Court of Appeals culled the antecedent facts that matter as follows:

The basic operative facts are not in dispute, to wit: Filipinas Synthetic Fiber Corporation . . ., a
domestic corporation received on December 27, 1979 a letter of demand . . . from the
Commissioner of Internal Revenue . . . assessing it for deficiency withholding tax at source in
the total amount of P829,748.77, inclusive of interest and compromise penalties, for the period
from the fourth quarter of 1974 to the fourth quarter of 1975. The bulk of the deficiency
withholding tax assessment, however, consisted of interest and compromise penalties for
alleged late payment of withholding taxes due on interest loans, royalties and guarantee fees
paid by the petitioner to non-resident corporations. The assessment was seasonably protested
by the petitioner through its auditor, SGV and Company. Respondent denied the protest in a
letter dated 14 May 1985 . . . on the following ground: "For Philippine internal revenue tax
purposes, the liability to withhold and pay income tax withheld at source from certain payments
due to a foreign corporation is at the time of accrual and not at the time of actual payment or
remittance thereof", citing BIR Ruling No. 71-003 and BIR Ruling No. 24-71-003-154-84 dated
12 September 1984 as well as the decision of the Court of Tax Appeals . . . in CTA Case No.
3307 entitled "Construction Resources of Asia, Inc., versus Commissioner of Internal Revenue".
The aforementioned case held that "the liability of the taxpayer to withhold and pay the income
tax withheld at source from certain payments due to a non-resident foreign corporation attaches
at the time of accrual payment or remittance thereof" and "the withholding agent/corporation is
obliged to remit the tax to the government since it already and properly belongs to the
government. Since the taxpayer failed to pay the withholding tax on interest, royalties, and
guarantee fee at the time of their accrual and in the books of the corporation the aforesaid
assessment is therefore legal and proper.

On June 28, 1985, petitioner brought a Petition for Review 3 before the Court of Tax Appeals,
docketed as CTA Case No. 3951. On June 15, 1993, the said court came out with its Decision,
ruling thus:

IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering petitioner to pay

respondent the amount of P306,165.35 as deficiency withholding tax at source for the fourth
quarter of 1974 to the third quarter of 1975 plus 10% surcharge and 14% annual interest from
November 29, 1979 to July 31, 1980, plus 20% interest from August 1, 1980 until fully paid but
not to exceed that which corresponds to a period of three (3) years pursuant to P.D. No.
1705.1âwphi1.nêt

SO ORDERED.

With the denial of its motion for reconsideration, petitioner appealed the CTA disposition to the
Court of Appeals, which affirmed in toto the appealed decision.
Dissatisfied therewith, petitioner found its way to this Court via the present Petition; contending
that:

THE CA ERRED IN HOLDING THAT FILSYN'S LIABILITY TO WITHHOLD THE INCOME TAX
FOR INTEREST, ROYALTIES AND DIVIDENDS, WHICH WERE PAYABLE TO NON-
RESIDENT FOREIGN CORPORATIONS, ATTACHED UPON "SETTING-UP" OR ACCRUAL
OF THESE AMOUNTS RATHER THAN WHEN SAID AMOUNTS BECOME DUE AND
DEMANDABLE UNDER THE APPLICABLE CONTRACTS.

In G.R. No. 124377, what is being questioned by petitioner is the assessed deficiency
withholding tax at source for the period from the fourth quarter of 1975 to the fourth quarter of
1976 amounting to P379,700.68.

The pivot of inquiry here is — whether the liability to withhold tax at source on income payments
to non-resident foreign corporations arises upon remittance of the amounts due to the foreign
creditors or upon accrual thereof.

It is petitioner's submission that the withholding taxes on the said interest income and royalties
were paid to the government when the subject interest and royalties were actually remitted
abroad. Stated otherwise, whatever amount has accrued in the books, the withholding tax due
thereon is ultimately paid to the government upon remittance abroad of the amount accrued.

Sec. 53 of the National Internal Revenue Code, in force at that time (1975), reads:

Withholding Tax at source . . .

xxx xxx xxx

(b) Non-resident aliens and foreign corporations — Every individual, corporation, partnership, or
association, in whatever capacity acting, including a lessee or mortgagor of real or personal
property, trustee acting in any trust capacity, executor, administrator, receiver, conservator,
fiduciary, employer, and every officer or employee of the Government of the Republic of the
Philippines having the control, receipt, custody, disposal, or payment of interest, dividends,
rents, royalties, salaries, wages, premiums, annuities, compensation, remunerations,
emoluments, or other fixed or determinable annual, periodical, or casual gains, profits, and
income, and capital gains, of any non-resident alien not engaged in trade or business within the
Philippines, shall (except in the case provided in sub-section (a) (1) of this Section) deduct and
withhold from the annual, periodical, or casual gains, profits, and income, and capital gains, a
tax equal to 30 per cent thereof.

xxx xxx xxx

(2) Non-resident foreign corporations — In the case of foreign corporations subject to tax under
this Title, not engaged in trade or business within the Philippines, there shall be deducted and
withheld at the source in the same manner and upon the same items as is provided in
subsection (b) (1) of this section, as well as on remunerations for technical services or
otherwise, a tax equal to thirty-five (35) per cent thereof. This tax shall be returned and paid in
and subject to the same conditions as provided in Section 54.

On the other hand, Section 54 of the same law, provides:

Returns and payments of taxes withheld at source —

(a) Quarterly return and payment of taxes withheld — Taxes deducted and withheld under
Section 53 shall be covered by a return and paid to the Commissioner of Internal Revenue or
his collection agent in the province, city, or municipality where the withholding agent has his
legal residence or principal place of business, or where the withholding agent is a corporation,
where the principal office is located. The taxes deducted and withheld by the withholding agent
shall be held as a special fund in trust for the Government until paid to the collecting officers.
The Commissioner of Internal Revenue may, with the approval of the Secretary of Finance,
require these withholding agents to pay or deposit the taxes deducted and withheld at more
frequent intervals when necessary to protect the interest of the Government. The return shall be
filed and the payment made within 25 days from the close of each calendar quarter . . .

The aforecited provisions of law are silent as to when does the duty to withhold the taxes arise.
And to determine the same, an inquiry as to the nature of accrual method of accounting, the
procedure used by the herein petitioner, and to the modus vivendi of withholding tax at source
come to the fore.

The method of withholding tax at source is a procedure of collecting income tax sanctioned by
the National Internal Revenue Code. Section 53 (c) of which, provides:

Return and Payment — Every person required to deduct and withhold any tax under this section
shall make return thereof, . . . for the payment of the tax, shall pay the amount withheld to the
officer of the Government of the Philippines authorized to receive it. Every such person is made
personally liable for such tax, and is indemnified against the claims and demands of any person
for the amount of any payments made in accordance with the provision of this section.

In the aforecited provision of law, the withholding agent is explicitly made personally liable for
the income tax withheld under Section 54. In Phil. Guaranty Co., Inc. vs. Commissioner of
Internal Revenue, 4 the Court, has ratiocinated:

The law sets no condition for the personal liability of the withholding agent to attach. The reason
is to compel the withholding agent to withhold the tax under all circumstances. In effect, the
responsibility for the collection of the tax as well as the payment thereof is concentrated upon
the person over whom the Government has jurisdiction. Thus, the withholding agent is
constituted the agent both the government and the taxpayer. With respect to the collection
and/or withholding of the tax, he is the Government's agent. In regard to the filing of the
necessary income tax return and the payment of the tax to the Government, he is the agent of
the taxpayer. The withholding agent, therefore, is no ordinary government agent especially
because under Section 53 (c) he is held personally liable for the tax he is duty bound to
withhold; whereas, the Commissioner of Internal Revenue and his deputies are not made liable
to law.

On the other hand, "under the accrual basis method of accounting, income is reportable when
all the events have occurred that fix the taxpayer's right to receive the income, and the amount
can be determined with reasonable accuracy. Thus, it is the right to receive income, and not the
actual receipt, that determines when to include the amount in gross income." 5 Gleanable from
this notion are the following requisites of accrual method of accounting, to wit: "(1) that the right
to receive the amount must be valid, unconditional and enforceable, i.e., not contingent upon
future time; (2) the amount must be reasonably susceptible of accurate estimate; and (3) there
must be a reasonable expectation that the amount will be paid in due course." 6

In the case at bar, after a careful examination of pertinent records, the Court concurred in the
finding by the Court of Appeals in CA GR. SP No. 32922 "that there was a definite liability, a
clear and imminent certainty that at the maturity of the loan contracts, the foreign corporation
was going to earn income in an ascertained amount, so much so that petitioner already
deducted as business expense the said amount as interests due to the foreign corporation. This
is allowed under the law, petitioner having adopted the "accrual method" of accounting in
reporting its incomes."

All things studiedly considered, the Court is of the opinion, and holds, that the Court of Appeals
erred not in ruling that:

. . . Petitioner cannot now claim that there is no duty to withhold and remit income taxes as yet
because the loan contract was not yet due and demandable. Having "written-off" the amounts
as business expense in its books, it had taken advantage of the benefit provided in the law
allowing for deductions from gross income. Moreover, it had represented to the BIR that the
amounts so deducted were incurred as a business expense in the form of interest and royalties
paid to the foreign corporations. It is estopped from claiming otherwise now. 7

WHEREFORE, the decisions of the Court of Appeals in CA GR. SP Nos. 32922 and 32022 are
hereby AFFIRMED in toto. No pronouncement as to costs.

SO ORDERED.

Melo, Vitug and Panganiban, JJ., concur.