G.R. No. L-15270; September 30, 1961
JOSE V. HERRERA and ESTER OCHANGCO HERRERA, petitioners, vs. THE QUEZON CITY BOARD OF ASSESSMENT APPEALS, respondent.

FACTS

Petitioners Jose V. and Ester O. Herrera own and operate St. Catherine’s Hospital in Quezon City. Initially granted real property tax exemption for 1953-1955, the City Assessor reclassified the properties as taxable in 1956. The hospital has 32 beds, with 20 reserved for charity patients and 12 for pay-patients. Charity patients receive free consultation, medicine, and medical service, though pay-patients are charged fees. The hospital also operates the St. Catherine’s School of Midwifery within the same premises, with about 200 students paying tuition and fees. The petitioners’ financial statements showed the hospital operated at a deficit, and they claimed income from pay-patients was used to improve charity wards.
The Quezon City Board of Assessment Appeals and the Court of Tax Appeals affirmed the assessment, ruling the properties were not used exclusively for charitable purposes. The lower courts emphasized the existence of pay wards, the family’s residential use of a portion, and the operation of the midwifery school, which they believed indicated the institution was not exclusively charitable.

ISSUE

Whether the lot, building, and improvements of St. Catherine’s Hospital are exempt from real property tax as properties used exclusively for charitable or educational purposes under the Constitution.

RULING

Yes, the properties are exempt. The Supreme Court reversed the lower courts, applying a liberal interpretation of the constitutional tax exemption for properties used exclusively for charitable or educational purposes. The legal logic centers on the “exclusive use” requirement not being defeated by incidental activities or the generation of income, provided the primary purpose is charitable.
The Court held that the hospital is a charitable institution. The admission of pay-patients and the fees charged do not negate its charitable character because the income derived is devoted to sustaining and improving the charity wards, which constitute almost two-thirds of its bed capacity. The operation at a deficit further supports its non-profit nature. The constitutional exemption is determined by the actual, direct, and immediate use of the property for charitable ends, not by the incidental ability to generate revenue.
Regarding the School of Midwifery, its operation within the hospital premises provides an independent ground for exemption as an educational use. The fact that the school may produce profit is immaterial to the property tax exemption, which is mandated by the Constitution irrespective of financial gain. The use of portions of the building for a garage and residence was deemed incidental and necessary to the operation of the hospital and school, thus not affecting the exclusive charitable and educational use. Therefore, the property is wholly exempt from real estate tax.