G.R. No. 27234, September 7, 1927
THE ROMAN CATHOLIC BISHOP OF NUEVA SEGOVIA, plaintiff-appellant, vs. THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.

FACTS

The Roman Catholic Bishop of Nueva Segovia, a corporation sole organized for religious, charitable, and educational purposes, paid under protest an income tax assessed by the Collector of Internal Revenue. The tax was levied on the corporation’s income for the year 1920, derived from rents, dividends, and interest on loans and deposits (totaling P34,359.33). The corporation also received smaller income from fees for religious services and tuition, all of which were used exclusively for its religious, charitable, and educational work. No part of the income inured to the benefit of any private individual. The Collector assessed the tax based on a proviso in Section 11(a), paragraph 6 of the Income Tax Law (Act No. 2833), which subjected to tax the income “of whatever kind and character from any of its properties, real or personal,” except income expressly exempted. The corporation argued that its income was exempt under the main provision of the same paragraph, which exempts income of corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes, provided no part of the net income inures to any private stockholder or individual.

ISSUE

Whether the income derived by the Roman Catholic Bishop of Nueva Segovia from its properties (rents, dividends, interest) is exempt from income tax under Section 11(a), paragraph 6 of Act No. 2833, despite the proviso added by the Philippine Legislature.

RULING

YES. The Supreme Court reversed the lower court’s decision and ordered the refund of the tax paid. The Court held that the income in question is exempt from taxation. The main provision of paragraph 6 exempts income of corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes, provided no part of the net income inures to any private individual. The proviso, which subjects income from properties to tax “except income expressly exempted by this law,” does not remove the exemption granted by the main provision. Since the corporation’s income is expressly exempted under the main clause (as it is used exclusively for religious, charitable, and educational purposes and does not inure to any private benefit), the proviso does not apply. The Court interpreted the proviso as having been added out of excessive caution and not intended to nullify the exemption. To hold otherwise would render the exemption clause meaningless. The destination and use of the income for exempt purposes is the ultimate test for exemption.