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CIR v. DLSU – Tax Exemption of Non-Stock, Non-Profit Educational Institutions

The tax exemption granted by the Constitution to non-stock, non-profit educational institutions is conditioned only on the actual, direct and exclusive use of their assets, revenues and income for educational purposes.

COMMISSIONER OF INTERNAL REVENUE, Petitioner vs. DE LA SALLE UNIVERSITY, INC., Respondent (G.R. No. 196596)

The tax exemption granted by the Constitution to non-stock, non-profit educational institutions is not subject to limitations imposed by law.

Facts:

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA) No. 2794 authorizing its revenue officers to examine the latter’s books of accounts and other accounting records for all internal revenue taxes for the period Fiscal Year Ending 2003 and Unverified Prior Years.

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the following deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and bookstores operating within the campus; (2) value-added tax (VAI) on business income; and (3) documentary stamp tax (DSI) on loans and lease contracts. 

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed on August 3, 2005 a petition for review with the CTA Division.

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article XIV, Section 4 (3) of the Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. xxx.

On January 5, 2010, the CTA Division partially granted DLSU’s petition for review. 

Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010 decision. On April 6, 2010, the CTA Division denied the Commissioner’s motion for reconsideration while it held in abeyance the resolution on DLSU’s motion for reconsideration.

On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622) arguing that DLSU’s use of its revenues and assets for non-educational or commercial purposes removed these items from the exemption coverage under the Constitution.

On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of documentary evidence to prove that its rental income was used actually, directly and exclusively for educational purposes.

On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced the amount of DLSU’s tax deficiencies.

Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued that the CTA Division erred in admitting DLSU’s additional evidence.

The CTA En Banc dismissed the Commissioner’s petition for review and sustained the findings of the CTA Division.

Relying on the findings of the court-commissioned Independent Certified Public Accountant (Independent CPA), the CTA En Banc found that DLSU was able to prove that a portion of the assessed rental income was used actually, directly and exclusively for educational purposes; hence, exempt from tax. The CTA En Banc was satisfied with DLSU’s supporting evidence confirming that part of its rental income had indeed been used to pay the loan it obtained to build the university’s Physical Education – Sports Complex.

Parenthetically, DLSU’s unsubstantiated claim for exemption, i.e., the part of its income that was not shown by supporting documents to have been actually, directly and exclusively used for educational purposes, must be subjected to income tax and VAT.

The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc’s December 10, 2010 decision. Thus, she came to the Supreme Court  for relief through a petition for review on certiorari.

Arguments of the CIR

The Commissioner submits that DLSU’s rental income is taxable regardless of how such income is derived, used or disposed of. DLSU’s operations of canteens and bookstores within its campus even though exclusively serving the university community do not negate income tax liability.

The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non-stock, non-profit educational institutions such that the revenues and income they derived from their assets, or from any of their activities conducted for profit, are taxable even if these revenues and income are used for educational purposes.

Issue:

Whether the income of DLSU from the leases of its real properties is subject to tax regardless of its disposition.

Ruling:

No.

The 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.

While the present petition appears to be a case of first impression, the Court in the YMCA case had in fact already analyzed and explained the meaning of Article XIV, Section 4 (3) of the Constitution. The Court in that case made doctrinal pronouncements that are relevant to the present case.

The Court then significantly laid down the requisites for availing the tax exemption under Article XIV, Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes.

We now adopt YMCA as precedent and hold that:

1. 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.

2. The tax-exemption constitutionally-granted to non-stock, non-profit educational institutions, is not subject to limitations imposed by law.

The tax exemption granted by the Constitution to non-stock, non-profit educational institutions is conditioned only on the actual, direct and exclusive use of their assets, revenues and income for educational purposes.

X x x x x a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the revenues and income must have also been sourced from educational activities or activities related to the purposes of an educational institution. The phrase all revenues is unqualified by any reference to the source of revenues. Thus, so long as the revenues and income are used actually, directly and exclusively for educational purposes, then said revenues and income shall be exempt from taxes and duties.

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.

That the Constitution treats non-stock, non-profit educational institutions differently from proprietary educational institutions cannot be doubted. As discussed, the privilege granted to the former is conditioned only on the actual, direct and exclusive use of their revenues and assets for educational purposes. In clear contrast, the tax privilege granted to the latter may be subject to limitations imposed by law.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purpose. We make this declaration in the exercise of and consistent with our duty to uphold the primacy of the Constitution.

For all these reasons, we hold that the income and revenues of DLSU proven to have been used actually, directly and exclusively for educational purposes are exempt from duties and taxes.


See: Income Tax Treatment of Educational Institutions