G.R. No. 196596 /G.R. No. 198841/G.R. No. 198941, November 9, 2016
Commissioner of Internal Revenue vs. De La Salle University, Inc.

FACTS

The Bureau of Internal Revenue (BIR) assessed De La Salle University, Inc. (DLSU) for deficiency income tax, value-added tax (VAT), and documentary stamp tax (DST) for taxable years 2001 to 2003. The assessment was based on DLSU’s rental income from campus canteens, bookstores, and other lease contracts, which the BIR deemed to be from activities conducted for profit, thus outside the constitutional tax exemption for non-stock, non-profit educational institutions. DLSU protested, arguing that all its revenues and assets are used actually, directly, and exclusively for educational purposes as mandated by Article XIV, Section 4(3) of the Constitution. The Court of Tax Appeals (CTA) Division partially granted DLSU’s petition, cancelling the DST on loans but upholding the deficiency taxes on rental income, though it later reduced the amount after admitting DLSU’s supplemental evidence.
Both parties appealed to the CTA En Banc. The Commissioner argued that the rental activities were commercial and that the CTA Division erred in admitting DLSU’s supplemental evidence. DLSU, in its appeal, contended the entire assessment was void due to an allegedly invalid Letter of Authority and that its rental income, like a similar case involving Ateneo de Manila University, was fully tax-exempt as the revenues were used for educational purposes. The CTA En Banc dismissed the Commissioner’s petition and partially granted DLSU’s, further reducing the tax liability but not cancelling it entirely.

ISSUE

Whether the rental income earned by DLSU from entities operating within its campus is exempt from income tax and VAT under the constitutional provision that revenues of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes.

RULING

The Supreme Court ruled that a portion of DLSU’s rental income is tax-exempt, but not the entirety. The constitutional tax exemption is not automatic; it requires proof that the revenue is used actually, directly, and exclusively for educational purposes. The Court affirmed the findings of the CTA En Banc and the Independent CPA it commissioned. DLSU successfully proved that a specific portion of its rental income (₱4,007,724.00) was used to pay a loan for constructing a sports complex, a purpose directly related to education. This portion is exempt.
However, for the remaining rental income placed in a Capital Fund account, DLSU failed to substantiate that all disbursements from this fund were for exclusive educational use. The Independent CPA verified that only 26.68% of the total disbursements from this account had sufficient supporting documents proving direct educational application. Consequently, only a corresponding proportional amount (₱1,761,588.35) of the income in that account is exempt. The Court upheld the CTA’s computation, making the unsubstantiated balance (₱4,841,066.65) subject to income tax and VAT. The legal logic is that the exemption is contingent on the actual, direct, and exclusive use of the revenue for education, and the burden of proof for such use rests on the institution claiming the exemption.