\G.R. No.

L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand,
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 taxation, which is the promotion of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00
deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The corollary
issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal Revenue was
made on time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering,
construction and other allied activities, received a letter from the petitioner assessing it in the total amount of P83,183.85
as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter of protest or request
for reconsideration, which letter was stamp received on the same day in the office of the petitioner. 2 On March 12, 1965,
a warrant of distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr.,
who refused to receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the case proved
fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of
the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on the protest
and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. 5 Sixteen days later, on
April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with the Court of
Tax Appeals.6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may be
made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule the warrant of distraint
and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for reconsideration," 9 being
"tantamount to an outright denial thereof and makes the said request deemed rejected." 10 But there is a special
circumstance in the case at bar that prevents application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its
letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued; indeed,
such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the
protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature
and could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was based
on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the
reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started
running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the
said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of
the reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary
reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held
that the said amount had been legitimately paid by the private respondent for actual services rendered. The payment was
in the form of promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil
Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate
Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal
holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion. 13 In fact, as
the said court found, the amount was earned through the joint efforts of the persons among whom it was distributed It has
been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent,
authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr.,
Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil
Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue received as
agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to
the aforenamed individuals.16

There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid
the corresponding taxes thereon.17 The Court of Tax Appeals also found, after examining the evidence, that no distribution
of dividends was involved.18

The petitioner claims that these payments are fictitious because most of the payees are members of the same family in
control of Algue. It is argued that no indication was made as to how such payments were made, whether by check or in
cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt
to evade a legitimate assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and
the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically and in
different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation where strict
business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the
year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to
make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was understandable,
however, in view of the close relationship among the persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission
paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. 21 After deducting the
said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was
60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically
everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar
Estate properties. This finding of the respondent court is in accord with the following provision of the Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as deductions
—

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for salaries or other compensation
for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or
incurred in carrying on any trade or business may be included a reasonable allowance for salaries or
other compensation for personal services actually rendered. The test of deductibility in the case of
compensation payments is whether they are reasonable and are, in fact, payments purely for service.
This test and deductibility in the case of compensation payments is whether they are reasonable and are,
in fact, payments purely for service. This test and its practical application may be further stated and
illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not
deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock.
This is likely to occur in the case of a corporation having few stockholders, Practically all of whom draw
salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the
excessive payment correspond or bear a close relationship to the stockholdings of the officers of
employees, it would seem likely that the salaries are not paid wholly for services rendered, but the
 excessive payments are a distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30
O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its controlling
stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed
deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private respondent
has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in
inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new
business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of
the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned
income to the taxing authorities, every person who is able to must contribute his share in the running of the government.
The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the
lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

But 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. If it is not, then the taxpayer has a right to
complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent
court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private respondent was
permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.

SO ORDERED.

G.R. No. 79307 August 29, 1989

COMMISSIONER OF CUSTOMS, petitioner,

vs.

THE HON. RAMON P. MAKASIAR, RTC Judge, Branch 35, Manila and THE DISTILLERS CO. LTD. OF ENGLAND,
respondents.

Quasha, Asperilla, Ancheta, Pena & Nolasco for private respondent.

CORTES, J.:

Petitioner Commissioner of Customs seeks the reversal of respondent judge's decision dated 20 July 1987 in Civil Case
No. 82-12821 entitled "The Distillers Co. Ltd., of England v. Victorio Francisco, et al.," the dispositive portion of which
reads as follows:

WHEREFORE, having been issued by the Collector of Customs in excess of his jurisdiction the disputed Warrant of
Seizure and Detention dated January 2, 1979, in Seizure Identification No. 2-79 of the Bureau of Customs, as well as all
the proceedings taken thereon are declared NULL and VOID, and the writ of prohibition prayed for is GRANTED. The
public respondent is ordered to REFRAIN and DESIST from conducting any proceedings for the seizure and forfeiture of
the articles in question until after the Court having taken cognizance and legal custody thereof has rendered its final
judgment in the criminal cases which involve the same articles. Without costs.

SO ORDERED. [RTC Decision, p. 7; Rollo, p. 26].

The undisputed acts are as follows:

On 7 December 1978, the then Court of First Instance of Manila (herein referred to as CFI-MANILA) issued Search and
Seizure Warrants in Criminal Case Nos. 8602 and 8603 entitled "People of the Philippines vs. Howard J. Sosis,, et al.," for
violation of Section 11 (a) and/or 11(e) of Republic Act No. 3720, * and violation of Article 188 of the Revised Penal Code
(captioned as "Substituting and altering trademarks, tradenames, or service marks"), respectively, and ordering the
seizure of the following:

a) Materials:

All whisky, bottles, labels, caps, cartons, boxes, machinery equipment or other materials used or intended to be used, or
suitable for use, in connection with counter-feiting or imitation of Johnnie Walker Scotch Whisky (Emphasis supplied)

b) Documents:

xxx

under the control and possession of:

1. Howard J. Sosis

2. George Morrison Lonie

3. Hercules Bottling Co.

4. Lauro Villanueva

5. Vicente Velasco

6. Manuel Esteban

7. Eugenio Mauricio

[Rollo, pp. 106-107].

On 8 December 1978, a composite team from the Ministry of Finance Bureau of Investigation and Intelligence (herein
referred to as BII), the Bureau of Customs and the Integrated National Police enforced the search and seizure warrants,
and seized and confiscated the following articles, among others, found in the premises of the Hercules Bottling Co., Inc.
(herein referred to as HERCULES) at Isla de Provisor, Paco, Manila:

Six (6) Tanks of Scotch Whisky; 417 cartons each containing I doz. bottles of "Johnnie Walker Black Label Whisky"; 109
empty bottles; Empty Cartons of "Johnnie Walker Black Label Scotch Whisky" number 900-2044 empty cartons. [Rollo, p.
21].

The articles seized remained in the premises of HERCULES guarded and secured by BII personnel.

On 2 January 1979, the Collector of Customs for the Port of Manila, after being informed of the seizure of the subject
goods and upon verification that the same were imported contrary to law, issued a warrant of seizure and detention, in
Seizure Identification No. 2-79, and ordered the immediate seizure and turnover of the seized items to its Auction and
Cargo Disposal Division at the Port of Manila. Seizure and forfeiture proceedings were then initiated against the above-
enumerated articles for alleged violation of Section 2530 (f) of the Tariff and Customs Code, in relation to Republic Act
3720, to wit:

Sec. 2530. Property subject to forfeiture under Tariff and Customs law:
xxx

(f) Any article the importation or exportation of which is effected or attempted contrary to law, or any article of prohibited
importation or exportation, and all other articles which, in the opinion of the collector have been used, are or were entered
to be used as instruments in the importation or exportation of the former.

xxx

On 29 January 1979, the CFI-MANILA issued an order authorizing the transfer and delivery of the seized articles to the
customs warehouse located at South Harbor, Port of Manila, subject to the following conditions:

1. The Commissioner of Customs is willing to have custody of the same and guarantees their safekeeping at all times in
the same quantity, quality, manner and condition when the articles shall be turned over to and received by the Bureau of
Customs in custodia legis, subject to the further orders from the Court;

2. No article shall be transferred without the presence of a representative of the applicant, the defendants, the
Commissioner of Customs and the Court; these representatives to secure the necessary escort as guarantee that nothing
will happen during the transfer of the articles.

3. The Commissioner of Customs to issue the proper and necessary receipt for each and every article transferred to and
received by the Bureau of Customs pursuant to this order [Rollo, p. 22].

Meanwhile, the validity and constitutionality of the issuance and service of the search and seizure warrants issued by the
CFI- MANILA were contested in and upheld by the Court of Appeals in CA-G.R. No. SP-09153-R entitled "Hercules
Bottling Co. Inc., et al., v. Victoriano Savellano, et al." HERCULES filed a petition for certiorari in the Supreme Court but in
a resolution dated 26 November 1986 in G.R. No. 55061 captioned as Hercules Bottling Co., Inc. v. The Court of Appeals,
the Court dismissed the petition.

Consequently, the City Fiscal of Manila proceeded with the preliminary investigation of the criminal cases, where private
respondent, The Distillers Co. Ltd. of England, claiming to be the owner and exclusive manufacturer of Johnnie Walker
Scotch Whiskey was the private complainant [Rollo, p. 61], With the dismissal of HERCULES' petition, the Bureau of
Customs also resumed hearing the seizure and forfeiture proceedings over the said articles.

The present controversy arose when private respondent, on 11 June 1982, objected to the continuation by the Collector of
Customs of the seizure proceedings claiming, among others, that these proceedings would hamper or even jeopardize the
preliminary investigation being conducted by the fiscal. The Collector of Customs ignored the objections.

In order to stop and enjoin the Hearing Officer of the Bureau of Customs from taking further action in the seizure
proceedings of the subject goods, private respondent on 24 September 1982 filed a petition for prohibition with preliminary
injunction and/or temporary restraining order, docketed as Civil Case No. 82-12721. It must be noted at this juncture that
the petition was heard not before the CFI-MANILA which originally issued the search warrants, but before another sala,
that of respondent judge of the Regional Trial Court, Branch 35, Manila.

Respondent judge issued a temporary restraining order on 29 September 1982. Subsequently, a writ for preliminary
injunction was issued as well. Petitioner filed an answer on 12 November 1982. On 20 July 1987, respondent judge
rendered a decision holding that the Collector of Customs acted in excess of its jurisdiction in issuing the warrant of
seizure and detention considering that the subject goods had already come under the legal custody of the CFI-MANILA.
Hence, petitioner represented by the Solicitor General, filed the instant petition on 11 August 1987.

In the meantime, Howard Sosis and company were charged for violation of Chapter VI, Sec. 11(a) & (e) of Republic Act
3720 in Criminal Case No. 88-63157 and for violation of Article 188 of the Revised Penal Code in Criminal Case No. 88-
63156 before the Regional Trial Court and the Metropolitan Trial Court of Manila, respectively [Rollo, p. 83].

In his petition, the Commissioner of Customs assigns as errors the following:

I. RESPONDENT JUDGE ERRED IN ISSUING A TEMPORARY RESTRAINING ORDER AND SUBSEQUENTLY A WRIT
OF INJUNCTION IN CIVIL CASE NO. 82-12721 NOTWITHSTANDING THE FACT THAT PRIVATE RESPONDENT, THE
DISTILLERS CO., LTD., OF ENGLAND HAS NO VALID CAUSE OF ACTION AGAINST HEREIN PETITIONER;
II. RESPONDENT RTC JUDGE GRAVELY ERRED IN TAKING COGNIZANCE OF THE PETITION AND IN
PROCEEDING TO HEAR AND RENDER A DECISION IN CIVIL CASE NO. 82-12721 NOTWITHSTANDING THE FACT
THAT THE TRIAL COURT HAS NO JURISDICTION OVER THE CASE [Rollo, pp. 10-11].

Petitioner contends that the authority of the Bureau of Customs over seizure and forfeiture cases is beyond the judicial
interference of the Regional Trial Court, even in the form of certiorari, prohibition or mandamus which are really attempts
to review the Commissioner's actions [Rollo, p. 98]. Petitioner argues that judicial recourse from the decision of the
Bureau of Customs on seizure and forfeiture cases can only be sought in the Court of Tax Appeals and eventually in this
Court.

Private respondent however contends that while the law may have vested exclusive jurisdiction in the Bureau of Customs
over forfeiture and seizure cases, in this case respondent judge had jurisdiction to enjoin the Bureau of Customs from
continuing with its seizure and forfeiture proceedings since the articles here were already in custodia legis, by virtue of the
search warrants issued by the CFI-MANILA. Private respondent contends that respondent judge may properly take
cognizance of the instant case since unlike the cases cited by petitioner, the action for prohibition was brought not to claim
ownership or possession over the goods but only to preserve the same and to prevent the Bureau of Customs from doing
anything prejudicial to the successful prosecution of the criminal cases [Rollo, p. 123].

The issue thus presented is whether or not respondent judge may enjoin the Collector of Customs from continuing with its
seizure and forfeiture proceedings over goods earlier seized by virtue of search warrants issued by the CFI-MANILA.

The instant petition is impressed with merit.

This Court finds that respondent-judge has failed to adhere to the prevailing rule which denies him jurisdiction to enjoin
the Bureau of Customs from taking further action in the seizure and forfeiture proceedings over the subject goods.

Jurisprudence is replete with cases which have held that regional trial courts are devoid of any competence to pass upon
the validity or regularity of seizure and forfeiture proceedings conducted in the Bureau of Customs, and to enjoin, or
otherwise interfere with, these proceedings. The Collector of Customs sitting in seizure and forfeiture proceedings has
exclusive jurisdiction to hear and determine all questions touching on the seizure and forfeiture of dutiable goods. The
regional trial courts are precluded from assuming cognizance over such matters even through petitions of certiorari,
prohibition or mandamus [See General Travel Service v. David, G.R. No. L-19259, September 23, 1966, 18 SCRA 59;
Pacis v. Averia, G.R. No. L-22526, November 29, 1966, 18 SCRA 907; De Joya v. Lantin, G.R. No. L-24037, April 27,
1967, 19 SCRA 893; Ponce Enrile v. Vinuya G.R. No. L-29043, January 30, 1971, 37 SCRA 381; Collector of Customs v.
Torres, G.R. No. L-22977, May 31, 1972, 45 SCRA 272; Pacis v. Geronimo, G.R. No. L-24068, April 23, 1974,56 SCRA
583; Commissioner of Customs v. Navarro, G.R. No. L-33146, May 31, 1977, 77 SCRA 264; Republic v. Bocar, G.R. No.
L-35260, September 4, 1979,93 SCRA 78; De la Fuente v. De Veyra, G.R. No. L-35385, January 31, 1983, 120 SCRA
451].

It is likewise well-settled that the provisions of the Tariff and Customs Code and that of Republic Act No. 1125, as
amended ** specify the proper fora for the ventilation of any legal objections or issues raised concerning these
proceedings. Actions of the Collector of Customs are appealable to the Commissioner of Customs, whose decisions, in
turn, are subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. Thereafter, an appeal lies to this Court
through the appropriate petition for review by writ of certiorari. Undeniably, regional trial courts do not share these review
powers.

The above rule is anchored upon the policy of placing no unnecessary hindrance on the government's drive not only to
prevent smuggling and other frauds upon customs, but also, and more importantly, to render effective and efficient the
collection of import and export duties due the state. For tariff and customs duties are taxes constituting a significant
portion of the public revenue which are the lifeblood that enables the government to carry out functions it has been
instituted to perform.

Notwithstanding these considerations, respondent judge entertained private respondent's petition for prohibition holding
that the seizure and forfeiture proceedings instituted in the Bureau of Customs was null and void because the subject
goods were earlier seized by virtue of the warrants issued by the CFI-MANILA in Criminal Cases Nos. 8602 and 8603.

This holding is erroneous.

Even if it be assumed that a taint of irregularity may be imputed to the exercise by the Collector of Customs of his
jurisdiction to institute seizure and forfeiture proceedings over the subject goods because he had accepted custody of the
same under conditions specified in the CFI-Manila order dated January 29, 1979, it would not mean that respondent judge
was correspondingly vested with the jurisdiction to interfere with such proceedings (See Ponce Enrile v. Vinuya supra]. It
bears repeating that law and settled jurisprudence clearly deprive the regional trial courts of jurisdiction to enjoin the
Collector of Customs from exercising his exclusive authority to order seizure and forfeiture proceedings over imported
goods.

Moreover, there is no legal basis for respondent judge's conclusion that the Collector of Customs is deprived of his
jurisdiction to issue the assailed warrant of seizure and detention, and to institute seizure and forfeiture proceedings for
the subject goods simply because the same were first taken in custodia legis.

Undeniably, the subject goods have been brought under the legal control of the CFI-MANILA by virtue of its search and
seizure warrants and are, therefore, in custodia legis. But this fact merely serves to deprive any other court or tribunal,
except one having supervisory control or superior jurisdiction in the premises, of the right to divest the CFI-MANILA of its
custody and control of the said property [Collector of Internal Revenue v. Flores Vda. de Codinera G.R. No. L-9675,
September 28, 1957], or to interfere with and change its possession without its consent [National Power Corporation v. De
Veyra, G.R. No. L-15763, December 22, 1961, 3 SCRA 646; De Leon v. Salvador, G.R. Nos. L-30871 & L-31603,
December 28, 1970, 36 SCRA 567; Vlasons Enterprises Corporation v. Court of Appeals, G.R. No. 61688, October 28,
1987, 155 SCRA 186].

In the instant case, the CFI-Manila was not divested of its jurisdiction over the subject goods, nor were its processes
interfered with by the Collector of Customs. It, in fact, authorized the transfer and delivery of the subject goods from the
premises of HERCULES to the Bureau of Customs warehouse/bodega at the South Harbor, Port of Manila thereby
entrusting the Bureau of Customs with the actual possession and control of the same.

On the other hand, since the Collector of Customs herein had actual possession and control over the subject goods, his
jurisdiction over the goods was secured for the purpose of instituting seizure and forfeiture proceedings to determine
whether or not the same were imported into the country contrary to law [See Papa v. Mago, G.R. No. L-27360, February
28, 1968, 22 SCRA 857]. This is consistent with the principle that the basic operative fact for the institution and perfection
of proceedings in rem like the seizure and forfeiture proceedings pursuant to the Tariff and Customs Code, is the actual or
constructive possession of the res by the tribunal empowered by law to conduct the proceedings [See Dodge v. US, 71 L.
ed. 392 (1926); US v. Mack, 79 L. ed. 1559 (1935) citing The Ann, 3 L. ed. 734 (1815); Fettig Canning Co. v. Steckler,
188 F. 2d 715 (1951) citing Strong v. US, 46 F. 2d 257, 79 ALR 150 (1931)].

Therefore, contrary to the import of respondent judge's decision, the Collector of Customs was not precluded by law or
legal principle from assuming jurisdiction over the subject goods. No legal infirmity attended the seizure and forfeiture
proceedings over the subject goods.

The Court must emphasize at this point that the instant case does not involve a conflict of jurisdictions. Proceedings
before the regular courts for criminal prosecutions against Howard Sosis, et al., and seizure and forfeiture proceedings for
the subject goods conducted by the Bureau of Customs may be maintained simultaneously and independently of each
other. For the nature of the two proceedings are entirely different such that a resolution in one is not decisive of the issue
in the other. The latter, which is administrative and civil in nature, is directed against the res or articles imported and
entails a determination of the legality of its importation. The former is directed against those persons who may be held
liable for violating the penal laws in connection with the importation [See Diosamito v. Balanque, G.R. No. L-30734, July
28,1969,28 SCRA 836; People v. CFI, G.R. No. L-41686, November 17, 1980, 101 SCRA 86].

Private respondent, however, argues that conflict may arise regarding the disposition of the subject goods if the
proceedings before the Collector of Customs and the regular courts were allowed to proceed simultaneously. Private
respondent contends that in view of the nature of the seizure and forfeiture proceedings, a judgment in favor of
HERCULES will result in the release of the subject goods to the claimants thereof, while an unfavorable decision will
entail their destruction or sale. It is asserted that either of the two outcomes will hamper or even jeopardize the ongoing
criminal prosecutions, said goods comprising the substantial part of the evidence for the People of the Philippines.
Proper adherence by both tribunals to the rules of comity as defined in the leading case of The Government of the
Philippines v. Gale [24 Phil. 95 (1931)] will forestall the conflict feared. In that case the Court had established the rule that
where the preservation and safekeeping of the subject matter of an action is demanded, as it is made to appear that these
articles may prove to be of vital importance as exhibits in the prosecution of other charges in another proceeding, the
rules for the orderly course of proceedings in courts and tribunals forbid the disposition or destruction thereof in one action
which would prejudice the other, and vice versa [Id. at pp. 98-99].

The State in the instant case must be given reasonable opportunity to present its cases for the proper enforcement of the
applicable provisions of the Revised Penal Code, Republic Act No. 3720, and the Tariff and Customs Code, and the
prosecution of the violators thereof. It follows then that the execution of any final decision in the seizure and forfeiture
case before the Bureau of Customs, whether it requires the destruction, sale or the release of the subject goods, should
not frustrate the prosecution's task of duly presenting and offering its evidence in Criminal Cases Nos. 88-63156 and 88-
63157.

It is apropos to note that for evidentiary purposes, it would not be necessary to present each and every item of the goods
in question before the courts trying the criminal cases. Thus, a representative quantity of the goods, as may be agreed
upon by the authorized customs officials and fiscals prosecuting the criminal cases, shall be set aside as evidence to be
presented in the above criminal cases and retained in custodia legis until final judgment is secured in these cases. The
rest of the goods may be disposed of in accordance with the final decision rendered in the seizure and forfeiture
proceedings pursuant to the Tariff and Customs Code.

WHEREFORE, in view of the foregoing, the respondent judge's decision dated 20 July 1987 is REVERSED. The seizure
and forfeiture proceedings involving the goods in question before the Bureau of Customs may proceed subject to the
above pronouncements relative to the setting aside of so much of the goods as may be required for evidentiary purposes.

SO ORDERED.

G.R. No. L-39086 June 15, 1988

ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner,

vs.

HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA, Provincial Treasurer, Abra; GASPAR
V. BOSQUE, Municipal Treasurer, Bangued, Abra; HEIRS OF PATERNO MILLARE, respondents.

PARAS, J.:

This is a petition for review on certiorari of the decision * of the defunct Court of First Instance of Abra, Branch I, dated
June 14, 1974, rendered in Civil Case No. 656, entitled "Abra Valley Junior College, Inc., represented by Pedro V.
Borgonia, plaintiff vs. Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar V. Bosque as Municipal Treasurer of
Bangued, Abra and Paterno Millare, defendants," the decretal portion of which reads:

IN VIEW OF ALL THE FOREGOING, the Court hereby declares:

That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the Provincial Treasurer of said province
against the lot and building of the Abra Valley Junior College, Inc., represented by Director Pedro Borgonia located at
Bangued, Abra, is valid;

That since the school is not exempt from paying taxes, it should therefore pay all back taxes in the amount of P5,140.31
and back taxes and penalties from the promulgation of this decision;
That the amount deposited by the plaintaff him the sum of P60,000.00 before the trial, be confiscated to apply for the
payment of the back taxes and for the redemption of the property in question, if the amount is less than P6,000.00, the
remainder must be returned to the Director of Pedro Borgonia, who represents the plaintiff herein;

That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before the trial must be returned to said
Municipal Treasurer of Bangued, Abra;

And finally the case is hereby ordered dismissed with costs against the plaintiff.

SO ORDERED. (Rollo, pp. 22-23)

Petitioner, an educational corporation and institution of higher learning duly incorporated with the Securities and
Exchange Commission in 1948, filed a complaint (Annex "1" of Answer by the respondents Heirs of Paterno Millare; Rollo,
pp. 95-97) on July 10, 1972 in the court a quo to annul and declare void the "Notice of Seizure' and the "Notice of Sale" of
its lot and building located at Bangued, Abra, for non-payment of real estate taxes and penalties amounting to P5,140.31.
Said "Notice of Seizure" of the college lot and building covered by Original Certificate of Title No. Q-83 duly registered in
the name of petitioner, plaintiff below, on July 6, 1972, by respondents Municipal Treasurer and Provincial Treasurer,
defendants below, was issued for the satisfaction of the said taxes thereon. The "Notice of Sale" was caused to be served
upon the petitioner by the respondent treasurers on July 8, 1972 for the sale at public auction of said college lot and
building, which sale was held on the same date. Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered the
highest bid of P6,000.00 which was duly accepted. The certificate of sale was correspondingly issued to him.

On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counstel a motion to dismiss the
complaint.

On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through then Provincial Fiscal Loreto
C. Roldan, filed their answer (Annex "2" of Answer by the respondents Heirs of Patemo Millare; Rollo, pp. 98-100) to the
complaint. This was followed by an amended answer (Annex "3," ibid, Rollo, pp. 101-103) on August 31, 1972.

On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid; Rollo, pp. 106-108).

On October 12, 1972, with the aforesaid sale of the school premises at public auction, the respondent Judge, Hon. Juan
P. Aquino of the Court of First Instance of Abra, Branch I, ordered (Annex "6," ibid; Rollo, pp. 109-110) the respondents
provincial and municipal treasurers to deliver to the Clerk of Court the proceeds of the auction sale. Hence, on December
14, 1972, petitioner, through Director Borgonia, deposited with the trial court the sum of P6,000.00 evidenced by PNB
Check No. 904369.

On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by the trial court in its questioned
decision. Said Stipulations reads:

STIPULATION OF FACTS

COME NOW the parties, assisted by counsels, and to this Honorable Court respectfully enter into the following agreed
stipulation of facts:

1. That the personal circumstances of the parties as stated in paragraph 1 of the complaint is admitted; but the particular
person of Mr. Armin M. Cariaga is to be substituted, however, by anyone who is actually holding the position of Provincial
Treasurer of the Province of Abra;

2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and buildings thereon located in Bangued, Abra
under Original Certificate of Title No. 0-83;

3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra caused to be served upon the Abra
Valley Junior College, Inc. a Notice of Seizure on the property of said school under Original Certificate of Title No. 0-83 for
the satisfaction of real property taxes thereon, amounting to P5,140.31; the Notice of Seizure being the one attached to
the complaint as Exhibit A;
4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc. was sold at public auction for the
satisfaction of the unpaid real property taxes thereon and the same was sold to defendant Paterno Millare who offered the
highest bid of P6,000.00 and a Certificate of Sale in his favor was issued by the defendant Municipal Treasurer.

5. That all other matters not particularly and specially covered by this stipulation of facts will be the subject of evidence by
the parties.

WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit this stipulation of facts on the point
agreed upon by the parties.

Bangued, Abra, April 12, 1973.

Sgd. Agripino Brillantes

Typ AGRIPINO BRILLANTES

Attorney for Plaintiff

Sgd. Loreto Roldan

Typ LORETO ROLDAN

Provincial Fiscal

Counsel for Defendants

Provincial Treasurer of

Abra and the Municipal

Treasurer of Bangued, Abra

Sgd. Demetrio V. Pre

Typ. DEMETRIO V. PRE

Attorney for Defendant

Paterno Millare (Rollo, pp. 17-18)

Aside from the Stipulation of Facts, the trial court among others, found the following: (a) that the school is recognized by
the government and is offering Primary, High School and College Courses, and has a school population of more than one
thousand students all in all; (b) that it is located right in the heart of the town of Bangued, a few meters from the plaza and
about 120 meters from the Court of First Instance building; (c) that the elementary pupils are housed in a two-storey
building across the street; (d) that the high school and college students are housed in the main building; (e) that the
Director with his family is in the second floor of the main building; and (f) that the annual gross income of the school
reaches more than one hundred thousand pesos.

From all the foregoing, the only issue left for the Court to determine and as agreed by the parties, is whether or not the lot
and building in question are used exclusively for educational purposes. (Rollo, p. 20)

The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon. Eustaquio Z. Montero, filed a
Memorandum for the Government on March 25, 1974, and a Supplemental Memorandum on May 7, 1974, wherein they
opined "that based on the evidence, the laws applicable, court decisions and jurisprudence, the school building and
school lot used for educational purposes of the Abra Valley College, Inc., are exempted from the payment of taxes."
(Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 and 49).

Nonetheless, the trial court disagreed because of the use of the second floor by the Director of petitioner school for
residential purposes. He thus ruled for the government and rendered the assailed decision.
After having been granted by the trial court ten (10) days from August 6, 1974 within which to perfect its appeal (Per Order
dated August 6, 1974; Annex "G" of Petition; Rollo, p. 57) petitioner instead availed of the instant petition for review on
certiorari with prayer for preliminary injunction before this Court, which petition was filed on August 17, 1974 (Rollo, p.2).

In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to the petition (Rollo, p. 58).
Respondents were required to answer said petition (Rollo, p. 74).

Petitioner raised the following assignments of error:

THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE COLLEGE LOT AND
BUILDING USED FOR EDUCATIONAL PURPOSES OF THE PETITIONER.

II

THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE PETITIONER ARE
NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES MERELY BECAUSE THE COLLEGE PRESIDENT
RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.

III

THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE PETITIONER ARE
NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING PETITIONER TO PAY P5,140.31 AS REALTY TAXES.

IV

THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00 DEPOSIT MADE IN THE
COURT BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY TAXES. (See Brief for the Petitioner, pp. 1-2)

The main issue in this case is the proper interpretation of the phrase "used exclusively for educational purposes."

Petitioner contends that the primary use of the lot and building for educational purposes, and not the incidental use
thereof, determines and exemption from property taxes under Section 22 (3), Article VI of the 1935 Constitution. Hence,
the seizure and sale of subject college lot and building, which are contrary thereto as well as to the provision of
Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal basis and therefore void.

On the other hand, private respondents maintain that the college lot and building in question which were subjected to
seizure and sale to answer for the unpaid tax are used: (1) for the educational purposes of the college; (2) as the
permanent residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his family including the in-laws
and grandchildren; and (3) for commercial purposes because the ground floor of the college building is being used and
rented by a commercial establishment, the Northern Marketing Corporation (See photograph attached as Annex "8"
(Comment; Rollo, p. 90]).

Due to its time frame, the constitutional provision which finds application in the case at bar is Section 22, paragraph 3,
Article VI, of the then 1935 Philippine Constitution, which expressly grants exemption from realty taxes for "Cemeteries,
churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively
for religious, charitable or educational purposes ...

Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic Act No. 409, otherwise
known as the Assessment Law, provides:

The following are exempted from real property tax under the Assessment Law:

xxx xxx xxx

(c) churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used
exclusively for religious, charitable, scientific or educational purposes.
xxx xxx xxx

In this regard petitioner argues that the primary use of the school lot and building is the basic and controlling guide, norm
and standard to determine tax exemption, and not the mere incidental use thereof.

As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this Court ruled that while it
may be true that the YMCA keeps a lodging and a boarding house and maintains a restaurant for its members, still these
do not constitute business in the ordinary acceptance of the word, but an institution used exclusively for religious,
charitable and educational purposes, and as such, it is entitled to be exempted from taxation.

In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352 [1972], this Court included in the
exemption a vegetable garden in an adjacent lot and another lot formerly used as a cemetery. It was clarified that the term
"used exclusively" considers incidental use also. Thus, the exemption from payment of land tax in favor of the convent
includes, not only the land actually occupied by the building but also the adjacent garden devoted to the incidental use of
the parish priest. The lot which is not used for commercial purposes but serves solely as a sort of lodging place, also
qualifies for exemption because this constitutes incidental use in religious functions.

The phrase "exclusively used for educational purposes" was further clarified by this Court in the cases of Herrera vs.
Quezon City Board of assessment Appeals, 3 SCRA 186 [1961] and Commissioner of Internal Revenue vs. Bishop of the
Missionary District, 14 SCRA 991 [1965], thus —

Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is 'not limited to
property actually indispensable' therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are incidental
to and reasonably necessary for the accomplishment of said purposes, such as in the case of hospitals, "a school for
training nurses, a nurses' home, property use to provide housing facilities for interns, resident doctors, superintendents,
and other members of the hospital staff, and recreational facilities for student nurses, interns, and residents' (84 CJS
6621), such as "Athletic fields" including "a firm used for the inmates of the institution. (Cooley on Taxation, Vol. 2, p.
1430).

The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution (Apostolic
Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).

It must be stressed however, that while this Court allows a more liberal and non-restrictive interpretation of the phrase
"exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine
Constitution, reasonable emphasis has always been made that exemption extends to facilities which are incidental to and
reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the use of the school building or
lot for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of the second floor
of the main building in the case at bar for residential purposes of the Director and his family, may find justification under
the concept of incidental use, which is complimentary to the main or primary purpose—educational, the lease of the first
floor thereof to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to
the purpose of education.

It will be noted however that the aforementioned lease appears to have been raised for the first time in this Court. That the
matter was not taken up in the to court is really apparent in the decision of respondent Judge. No mention thereof was
made in the stipulation of facts, not even in the description of the school building by the trial judge, both embodied in the
decision nor as one of the issues to resolve in order to determine whether or not said properly may be exempted from
payment of real estate taxes (Rollo, pp. 17-23). On the other hand, it is noteworthy that such fact was not disputed even
after it was raised in this Court.

Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the first time on appeal. Nonetheless,
as an exception to the rule, this Court has held that although a factual issue is not squarely raised below, still in the
interest of substantial justice, this Court is not prevented from considering a pivotal factual matter. "The Supreme Court is
clothed with ample authority to review palpable errors not assigned as such if it finds that their consideration is necessary
in arriving at a just decision." (Perez vs. Court of Appeals, 127 SCRA 645 [1984]).

Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building as well as the lot
where it is built, should be taxed, not because the second floor of the same is being used by the Director and his family for
residential purposes, but because the first floor thereof is being used for commercial purposes. However, since only a
portion is used for purposes of commerce, it is only fair that half of the assessed tax be returned to the school involved.

PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is hereby AFFIRMED subject to
the modification that half of the assessed tax be returned to the petitioner.

SO ORDERED.