Actual realization of profits is immaterial; what is important is the presence of the purpose to make a profit over and above the cost of instruction. At any rate, the main evidence of the purpose of a corporation should be its articles of incorporation and by-laws, for such purpose is required by statute to be stated in the articles of incorporation and the by-laws outline the administrative organization of the corporation which, in turn, is supposed to insure or facilitate the accomplishment of said purpose.
This is an appeal taken by defendant, Collector of Internal Revenue, from a decision of the Court of First Instance of Manila sentencing him to refund to plaintiff, Jesus Sacred Heart College, the sum of P2,241.86, assessed by the former, and paid by the latter, by way of income tax for the years 1947, 1948 and 1949. The parties have stipulated:
1. That the Jesus Sacred Heart College is an educational organization authorized to operate and existing in Lucena, Quezon, and offering to the public elementary, secondary and collegiate courses;
2. That according to its income tax returns, plaintiff realized net incomes from tuition and other fees in carrying on its educational activity in the amounts of P5,659.07; P3,743.82; and P3,572.74 for the years 1947, 1948 and 1949 respectively;
3. That the amount of P2,241.86 (was paid by the plaintiff to the defendant on August 13, 1951 as its income tax.
4. That a claim for refund of said amount of P2,241.86 was duly filed on August 16, 1951 by the plaintiff with the defendant but the claim was denied on August 24, 1951;
5. The assessment notices for the deficiency income tax for the years 1947, 1948 and 1949 were forwarded by the defendant to the plaintiff on or about December 15, 1950, the letter enclosing the said notices was dated December 12, 1950, and the notices were dated December 6, 1950.
Plaintiff appellee maintains, and the lower court held, that it is exempt from taxation under the first part of said paragraph (e), whereas defendant-appellant asserts that the income in question was derived form an "activity conducted for profit," and that, accordingly, it is taxable under the proviso of the same paragraph.
Whether or not the net income from the tuition and other fees collected and received by the plaintiff is subject to income tax under the provisions of section 24 of the National Internal Revenue Code, notwithstanding the provisions of section 27(e).
Section 27(e) of the National Internal Revenue Code, as amended by Republic Act No. 82 (section 5), exempts from taxation the "net income" of corporations "organized and operated exclusively for ... educational purposes ... no part of the net income of which inures to the benefit of any private stockholder or individual," and it is conceded that plaintiff corporation belongs to this class. To hold that an educational Institution is subject to income tax whenever it is so administered as to reasonably assure that it will not incur in deficit, is to nullify and defeat the aforementioned exemption. Indeed, the effect, in general, of the interpretation advocate by appellant would be to deny the exemption whenever there is net income, contrary to the tenor of said section 27(e) which positively exempts from taxation those corporations or associations which, otherwise, would be subject thereto, because of the existence of said net income.
Needless to say, every responsible organization must be so run to, at least insure its existence, by operating within the limits of its own resources, especially its regular income. In other words, it should always strive, whenever possible, to have a surplus.
At any rate, the main evidence of the purpose of a corporation should be its articles of incorporation and by-laws, for such purpose is required by statute to be stated in the articles of incorporation (Sec. 6, Act No. 1459), and the by-laws outline the administrative organization of the corporation (Sec. 20 and 21 of Act No. 1459, as amended), which, in turn, is supposed to insure or facilitate the accomplishment of said purpose.