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Commissioner of Internal Revenue (Cir) V. de La Salle University, Inc. (DLSU)

The Supreme Court ruled that De La Salle University's (DLSU) income from renting space to restaurants and bookstores on campus is exempt from taxes. As a non-stock, non-profit educational institution, DLSU is exempt from taxes on all revenues and assets that are actually, directly, and exclusively used for educational purposes according to the Philippine Constitution. The Court found that DLSU proved its rental income was used for educational purposes and struck down provisions of the Tax Code attempting to limit this constitutional tax exemption. The ruling only applies to non-stock, non-profit educational institutions, not proprietary schools subject to different tax rules.

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7K views

Commissioner of Internal Revenue (Cir) V. de La Salle University, Inc. (DLSU)

The Supreme Court ruled that De La Salle University's (DLSU) income from renting space to restaurants and bookstores on campus is exempt from taxes. As a non-stock, non-profit educational institution, DLSU is exempt from taxes on all revenues and assets that are actually, directly, and exclusively used for educational purposes according to the Philippine Constitution. The Court found that DLSU proved its rental income was used for educational purposes and struck down provisions of the Tax Code attempting to limit this constitutional tax exemption. The ruling only applies to non-stock, non-profit educational institutions, not proprietary schools subject to different tax rules.

Uploaded by

Violet Parker
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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COMMISSIONER OF INTERNAL REVENUE (CIR) v. DE LA SALLE UNIVERSITY, INC.

(DLSU)
808 SCRA 156, G.R. No. 196596, G.R. No. 198841, G.R. No. 198941
November 9, 2016

 There is a marked distinction between the treatment of nonstock, non-profit educational


institutions and proprietary educational institutions. The tax exemption granted to non-
stock, non-profit educational institutions is conditioned only on the actual, direct and
exclusive use of their revenues and assets for educational purposes. While tax exemptions
may also be granted to proprietary educational institutions, these exemptions may be
subject to limitations imposed by Congress.

 A proprietary educational institution is entitled only to the reduced rate of ten percent
(10%) corporate income tax. The reduced rate is applicable only if:
1) the proprietary educational institution is nonprofit and
2) its gross income from unrelated trade, business or activity does not exceed fifty
percent (50%) of its total gross income.

Facts:
The BIR assessed DLSU of deficiency taxes involving, among others, income tax on rental
earnings from restaurants/canteens and bookstores operating within the campus.

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on


Article XIV, Section 4 (3) of the Constitution, which states that 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.

The CIR submits that DLSU's operations of canteens and bookstores within its campus even
though exclusively serving the university community do not negate income tax liability.
The CIR contends that Article XIV, Section 4 (3) of the Constitution must be harmonized
with Section 30 (H) of the Tax Code, which states among others, that the income of
whatever kind and character of a non-stock and non-profit educational institution from any
of its properties, real or personal, or from any of its activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed by this
Code. The CIR posits that a tax-exempt organization like DLSU is exempt only from
property tax but not from income tax on the rentals earned from property. Thus, DLSU's
income from the leases of its real properties is not exempt from taxation even if the income
would be used for educational purposes.

Issue:
Whether DLSU's income and revenues proved to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes.

Held:
Yes, the income and revenues of DLSU were proven to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes.
Before fully discussing the merits of the case, the Court observed that:

First, the constitutional provision refers to two kinds of educational institutions: (1)
non-stock, non-profit educational institutions and (2) proprietary educational
institutions

Second, DLSU falls under the first category. Even the Commissioner admits the status of
DLSU as a non-stock, non-profit educational institution.

Third, while DLSU's claim for tax exemption arises from and is based on the
Constitution, the Constitution, in the same provision, also imposes certain conditions to
avail of the exemption.

Fourth, there is a marked distinction between the treatment of nonstock, non-profit


educational institutions and proprietary educational institutions. The tax exemption
granted to non-stock, non-profit educational institutions is conditioned only on the
actual, direct and exclusive use of their revenues and assets for educational purposes.
While tax exemptions may also be granted to proprietary educational institutions, these
exemptions may be subject to limitations imposed by Congress.

The Court found that unlike Article VI, Section 28 (3) of the Constitution (pertaining to
charitable institutions, churches, parsonages or convents, mosques, and non-profit
cemeteries), which exempts from tax only the assets, i.e., "all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes...," Article XIV, Section 4 (3) categorically states that "all revenues
and assets... used actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties."
The addition and express use of the word revenues in Article XIV, Section 4 (3) of the
Constitution is not without significance.
The Court found that the text demonstrates the policy of the 1987 Constitution, discernible
from the records of the 1986 Constitutional Commission to provide broader tax privilege to
non-stock, non-profit educational institutions as recognition of their role in assisting the
State provide a public good. 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.
Further, 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.
While a non-stock, non-profit educational institution is classified as a tax-exempt entity
under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a proprietary
educational institution is covered by Section 27 (Rates of Income Tax on Domestic
Corporations).
By the Tax Code's clear terms, a proprietary educational institution is entitled only to the
reduced rate of 10% corporate income tax. The reduced rate is applicable only if: (1) the
proprietary educational institution is nonprofit and (2) its gross income from unrelated
trade, business or activity does not exceed 50% of its total gross income.
Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply
to non-stock, non-profit educational institutions.
Thus, the Court declared 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. The Court made this declaration in the
exercise of and consistent with the duty to uphold the primacy of the Constitution.
Finally, the Court stressed that the holding here pertains only to non-stock, non-
profit educational institutions and does not cover the other exempt organizations under
Section 30 of the Tax Code.

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