G.R. No.

102967 February 10, 2000

BIBIANO V. BAAS, JR., petitioner, 1976 Declaration of Income on Disposition of Capital Asset subject to Tax:
vs.
COURT OF APPEALS, AQUILINO T. LARIN, RODOLFO TUAZON AND PROCOPIO Initial Payment P461,754.00
TALON, respondents.
Less: Cost of land and other incidental Expenses ( 76,547.90)
QUISUMBING, J.:

Income P385,206.10
For review is the Decision of the Court of Appeals in CA-C.R. CV No. 17251 promulgated on
November 29, 1991. It affirmed in toto the judgment of the Regional Trial Court (RTC), Branch 39,
Manila, in Civil Case No. 82-12107. Said judgment disposed as follows:
Income subject to tax (P385,206. 10 x 50%) P192,603.65

FOR ALL THE FOREGOING CONSIDERATIONS, this Court hereby renders judgment
DISMISSING the complaint against all the defendants and ordering plaintiff [herein
petitioner] to pay defendant Larin the amount of P200,000.00 (Two Hundred Thousand
Pesos) as actual and compensatory damages; P200,000.00 as moral damages; and
P50,000.00 as exemplary damages and attorneys fees of P100,000.00. 1
The facts, which we find supported by the records, have been summarized by the Court of Appeals
as follows:
On February 20, 1976, petitioner, Bibiano V. Baas Jr. sold to Ayala Investment Corporation
(AYALA), 128,265 square meters of land located at Bayanan, Muntinlupa, for two million, three
hundred eight thousand, seven hundred seventy (P2,308,770.00) pesos. The Deed of Sale
provided that upon the signing of the contract AYALA shall pay four hundred sixty-one thousand,
seven hundred fifty-four (P461,754.00) pesos. The balance of one million, eight hundred forty-
seven thousand and sixteen (P1,847,016.00) pesos was to be paid in four equal consecutive
annual installments, with twelve (12%) percent interest per annum on the outstanding balance.
AYALA issued one promissory note covering four equal annual installments. Each periodic
payment of P461,754.00 pesos shall be payable starting on February 20, 1977, and every year
thereafter, or until February 20, 1980.
In the succeeding years, until 1979, petitioner reported a uniform income of two hundred thirty
thousand, eight hundred seventy-seven (P230,877.00) pesos 4 as gain from sale of capital asset. In
his 1980 income tax amnesty return, petitioner also reported the same amount of P230,877.00 as
the realized gain on disposition of capital asset for the year.
On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo
Tuazon and Procopio Talon to examine the books and records of petitioner for the year 1976. They
discovered that petitioner had no outstanding receivable from the 1976 land sale to AYALA and
concluded that the sale was cash and the entire profit should have been taxable in 1976 since the
income was wholly derived in 1976.
Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninety-five
thousand, nine hundred fifteen (P2,095,915.00) pesos in petitioner's 1976 net income. They
recommended deficiency tax assessment for two million, four hundred seventy-three thousand, six
hundred seventy-three (P2,473,673.00) pesos.

The same day, petitioner discounted the promissory note with AYALA, for its face value of
P1,847,016.00, evidenced by a Deed of Assignment signed by the petitioner and AYALA. AYALA
issued nine (9) checks to petitioner, all dated February 20, 1976, drawn against Bank of the
Philippine Islands with the uniform amount of two hundred five thousand, two hundred twenty-four
(P205,224.00) pesos.
In his 1976 Income Tax Return, petitioner reported the P461,754 initial payment as income from
disposition of capital asset.2
Meantime, Aquilino Larin succeeded Calaguio as Regional Director of Manila Region IV-A. After
reviewing the examiners' report, Larin directed the revision of the audit report, with instruction to
consider the land as capital asset. The tax due was only fifty (50%) percent of the total gain from
sale of the property held by the taxpayer beyond twelve months pursuant to Section 34 5 of the
1977 National Internal Revenue Code (NIRC). The deficiency tax assessment was reduced to nine
hundred thirty six thousand, five hundred ninety-eight pesos and fifty centavos (P936,598.50),
inclusive of surcharges and penalties for the year 1976.
On June 27, 1980, respondent Larin sent a letter to petitioner informing of the income tax
deficiency that must be settled him immediately.

Selling Price of Land P2,308,770.00

On September 26, 1980, petitioner acknowledged receipt of the letter but insisted that the sale of
Less Initial Payment 461,754.00 3 his land to AYALA was on installment.

Unrealized Gain
P1,847,016.00
On June 8, 1981, the matter was endorsed to the Acting Chief of the Legal Branch of the National III. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF
Office of the BIR. The Chief of the Tax Fraud Unit recommended the prosecution of a criminal case PRESIDENTIAL DECREE NOS. 1740 AND 1840, AMONG OTHERS, PETITIONER'S
for conspiring to file false and fraudulent returns, in violation of Section 51 of the Tax Code against IMMUNITY FROM CRIMINAL PROSECUTION.
petitioner and his accountants, Andres P. Alejandre and Conrado Baas.

IV. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF

On June 17, 1981, Larin filed a criminal complaint for tax evasion against the petitioner. WELL-ESTABLISHED DOCTRINES OF THIS HONORABLE COURT AS REGARDS
THE AWARD OF ACTUAL, MORAL AND EXEMPLARY DAMAGES IN FAVOR OF
RESPONDENT LARIN.
On July 1, 1981, news items appeared in the now defunct Evening Express with the headline: "BIR
Charges Realtor" and another in the defunct Evening Post with a news item: "BIR raps Realtor, 2
accountants." Another news item also appeared in the July 2, 1981, issue of the Bulletin Today In essence, petitioner asks the Court to resolve seriatim the following issues:
entitled: "3-face P1-M tax evasion raps." All news items mentioned petitioner's false income tax
return concerning the sale of land to AYALA.
1. Whether respondent court erred in ruling that there was no extortion attempt by BIR
officials;
On July 2, 1981, petitioner filed an Amnesty Tax Return under P.D. 1740 and paid the amount of
forty-one thousand, seven hundred twenty-nine pesos and eighty-one centavos (P41,729.81). On
November 2, 1981, petitioner again filed an Amnesty Tax Return under P.D. 1840 and paid an 2. Whether respondent court erred in holding that P.D. 1740 and 1840 granting tax
additional amount of one thousand, five hundred twenty-five pesos and sixty-two centavos amnesties did not grant immunity from tax suits;
(P1,525.62). In both, petitioner did not recognize that his sale of land to AYALA was on cash basis.
3. Whether respondent court erred in finding that petitioner's income from the sale of
Reacting to the complaint for tax evasion and the news reports, petitioner filed with the RTC of land in 1976 should be declared as a cash transaction in his tax return for the same
Manila an action6 for damages against respondents Larin, Tuazon and Talon for extortion and year (because the buyer discounted the promissory note issued to the seller on future
malicious publication of the BIR's tax audit report. He claimed that the filing of criminal complaints installment payments of the sale, on the same day of the sale);
against him for violation of tax laws were improper because he had already availed of two tax
amnesty decrees, Presidential Decree Nos. 1740 and 1840.
4. Whether respondent court erred and committed grave abuse of discretion in
awarding damages to respondent Larin.
The trial court decided in favor of the respondents and awarded Larin damages, as already stated.
Petitioner seasonably appealed to the Court of Appeals. In its decision of November 29, 1991, the
The first issue, on whether the Court of Appeals erred in finding that there was no extortion,
respondent court affirmed the trial court's decision, thus:
involves a determination of fact. The Court of Appeals observed,

The finding of the court a quo that plaintiff-appellant's actions against defendant-
The only evidence to establish the alleged extortion attempt by defendants-appellees is
appellee Larin were unwarranted and baseless and as a result thereof, defendant-
the plaintiff-appellant's self serving declarations.
appellee Larin was subjected to unnecessary anxiety and humiliation is therefore
supported by the evidence on record.1wphi1.nt
As found by the court a quo, "said attempt was known to plaintiff-appellant's son-in-law
and counsel on record, yet, said counsel did not take the witness stand to corroborate
Defendant-appellee Larin acted only in pursuance of the authority granted to him. In
the testimony of plaintiff."8
fact, the criminal charges filed against him in the Tanodbayan and in the City Fiscal's
Office were all dismissed.
As repeatedly held, findings of fact by the Court of Appeals especially if they affirm factual findings
7 of the trial court will not be disturbed by this Court, unless these findings are not supported by
WHEREFORE, the appealed judgment is hereby AFFIRMED in toto.
evidence.9 Similarly, neither should we disturb a finding of the trial court and appellate court that an
allegation is not supported by evidence on record. Thus, we agree with the conclusion of
Hence this petition, wherein petitioner raises before us the following queries: respondent court that herein private respondents, on the basis of evidence, could not be held liable
for extortion.

I. WHETHER THE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF

PERTINENT TAX LAWS, THUS IT FAILED TO APPRECIATE THE CORRECTNESS On the second issue of whether P.D. Nos. 1740 and 1840 which granted tax amnesties also
AND ACCURACY OF PETITIONER'S RETURN OF THE INCOME DERIVED FROM granted immunity from criminal prosecution against tax offenses, the pertinent sections of these
THE SALE OF THE LAND TO AYALA. laws state:

II. WHETHER THE RESPONDENT COURT ERRED IN NOT FINDING THAT THERE
WAS AN ALLEGED ATTEMPT TO EXTORT [MONEY FROM] PETITIONER BY
PRIVATE RESPONDENTS.
 P.D. No. 1740. CONDONING PENALTIES FOR CERTAIN VIOLATIONS
OF THE INCOME TAX LAW UPON VOLUNTARY DISCLOSURE OF
UNDECLARED INCOME FOR INCOME TAX PURPOSES AND
REQUIRING PERIODIC SUBMISSION OF NET WORTH STATEMENT.
xxx xxx xxx
Sec. 1. Voluntary Disclosure of Correct Taxable Income. Any individual who, for any
or all of the taxable years 1974 to 1979, had failed to file a return is hereby, allowed to
file a return for each of the aforesaid taxable years and accurately declare therein the
true and correct income, deductions and exemptions and pay the income tax due per
return. Likewise, any individual who filed a false or fraudulent return for any taxable
year in the period mentioned above may amend his return and pay the correct amount
of tax due after deducting the taxes already paid, if any, in the original declaration.
(emphasis ours)
xxx xxx xxx
Sec. 5. Immunity from Penalties. Any individual who voluntarily files a return under
this Decree and pays the income tax due thereon shall be immune from the penalties,
civil or criminal, under the National Internal Revenue Code arising from failure to pay
the correct income tax with respect to the taxable years from which an amended return
was filed or for which an original return was filed in cases where no return has been
filed for any of the taxable years 1974 to 1979: Provided, however, That these
immunities shall not apply in cases where the amount of net taxable income declared
under this Decree is understated to the extent of 25% or more of the correct net
taxable income. (emphasis ours)
P.D. NO. 1840 GRANTING A TAX AMNESTY ON UNTAXED INCOME
AND/OR WEALTH EARNED OR ACQUIRED DURING THE TAXABLE
YEARS 1974 TO 1980 AND REQUIRING THE FILING OF THE
STATEMENT OF ASSETS, LIABILITIES, AND NET WORTH.
Sec. 1. Coverage. In case of voluntary disclosure of previously untaxed income
and/or wealth such as earnings, receipts, gifts, bequests or any other acquisition from
any source whatsoever, realized here or abroad, by any individual taxpayer, which are
taxable under the National Internal Revenue Code, as amended, the assessment and
collection of all internal revenue taxes, including the increments or penalties on
account of non-payment, as well as all civil, criminal or administrative liabilities arising
from or incident thereto under the National Internal Revenue Code, are hereby
condoned provided that the individual taxpayer shall pay. (emphasis ours) . . .
Sec. 2. Conditions for Immunity. The immunity granted under Section one of this
Decree shall apply only under the following conditions:
a) Such previously untaxed income and/or wealth must have been earned
or realized in any of the years 1974 to 1980;
b) The taxpayer must file an amnesty return on or before November 30,
1981, and fully pay the tax due thereon;
c) The amnesty tax paid by the taxpayer under this Decree shall not be less
than P1,000.00 per taxable year; and
d) The taxpayer must file a statement of assets, liabilities and net worth as
of December 31, 1980, as required under Section 6 hereof. (emphasis
ours)
It will be recalled that petitioner entered into a deed of sale purportedly on installment. On the
same day, he discounted the promissory note covering the future installments. The discounting
seems questionable because ordinarily, when a bill is discounted, the lender (e.g. banks, financial
institution) charges or deducts a certain percentage from the principal value as its compensation.
Here, the discounting was done by the buyer. On July 2, 1981, two weeks after the filing of the tax
evasion complaint against him by respondent Larin on June 17, 1981, petitioner availed of the tax
amnesty under P.D. No. 1740. His amended tax return for the years 1974 - 1979 was filed with the
BIR office of Valenzuela, Bulacan, instead of Manila where the petitioner's principal office was
located. He again availed of the tax amnesty under P.D. No. 1840. His disclosure, however, did not
include the income from his sale of land to AYALA on cash basis. Instead he insisted that such sale
was on installment. He did not amend his income tax return. He did not pay the tax which was
considerably increased by the income derived from the discounting. He did not meet the twin
requirements of P.D. 1740 and 1840, declaration of his untaxed income and full payment of tax due
thereon. Clearly, the petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840. The mere
filing of tax amnesty return under P.D. 1740 and 1840 does not ipso facto shield him from immunity
against prosecution. Tax amnesty is a general pardon to taxpayers who want to start a clean tax
slate. It also gives the government a chance to collect uncollected tax from tax evaders without
having to go through the tedious process of a tax case. To avail of a tax amnesty granted by the
government, and to be immune from suit on its delinquencies, the tax payer must have voluntarily
disclosed his previously untaxed income and must have paid the corresponding tax on such
previously untaxed income.10
It also bears noting that a tax amnesty, much like a tax exemption, is never favored nor presumed
in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be
construed strictly against the taxpayer and liberally in favor of the taxing authority. 11 Hence, on this
matter, it is our view that petitioner's claim of immunity from prosecution under the shield of
availing tax amnesty is untenable.
On the third issue, petitioner asserts that his sale of the land to AYALA was not on cash basis but
on installment as clearly specified in the Deed of Sale which states:
That for and in consideration of the sum of TWO MILLION THREE HUNDRED EIGHT
THOUSAND SEVEN HUNDRED SEVENTY (P2,308,770.00) PESOS Philippine
Currency, to be paid as follows:
1. P461,754.00, upon the signing of the Deed of Sale; and,
2. The balance of P1,847,016.00, to be paid in four (4) equal, consecutive,
annual installments with interest thereon at the rate of twelve percent
(12%) per annum, beginning on February 20, 1976, said installments to be
evidenced by four (4) negotiable promissory notes. 12
Petitioner resorts to Section 43 of the NIRC and Sec. 175 of Revenue Regulation No. 2 to support
his claim.
Sec. 43 of the 1977 NIRC states,
Installment basis. (a) Dealers in personal property. . . .
(b) Sales of realty and casual sales of personalty In the case (1) of a casual sale or
other casual disposition of personal property (other than property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the close of the
taxable year), for a price exceeding one thousand pesos, or (2) of a sale or other
disposition of real property if in either case the initial payments do not exceed twenty-
five percentum of the selling price, the income may, under regulations prescribed by
the Minister of Finance, be returned on the basis and in the manner above prescribed
in this section. As used in this section the term "initial payment" means the payments
received in cash or property other than evidences of indebtedness of the purchaser
during the taxable period in which the sale or other disposition is made. . . . (emphasis
ours)
Revenue Regulation No. 2, Section 175 provides,
Sale of real property involving deferred payments. Under section 43 deferred-
payment sales of real property include (1) agreements of purchase and sale which
contemplate that a conveyance is not to be made at the outset, but only after all or a
substantial portion of the selling price has been paid, and (b) sales in which there is an
immediate transfer of title, the vendor being protected by a mortgage or other lien as to
deferred payments. Such sales either under (a) or (b), fall into two classes when
considered with respect to the terms of sale, as follows:
(1) Sales of property on the installment plan, that is, sales in which the
payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable year in which the sale is
made do not exceed 25 per cent of the selling price;
(2) Deferred-payment sales not on the installment plan, that is sales in
which the payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable year in which the sale is
made exceed 25 per cent of the selling price;
In the sale of mortgaged property the amount of the mortgage, whether the property is
merely taken subject to the mortgage or whether the mortgage is assumed by the
purchaser, shall be included as a part of the "selling price" but the amount of the
mortgage, to the extent it does not exceed the basis to the vendor of the property sold,
shall not be considered as a part of the "initial payments" or of the "total contract price,"
as those terms are used in section 43 of the Code, in sections 174 and 176 of these
regulations, and in this section. The term "initial payments" does not include amounts
received by the vendor in the year of sale from the disposition to a third person of notes
given by the vendee as part of the purchase price which are due and payable in
subsequent years. Commissions and other selling expenses paid or incurred by the
vendor are not to be deducted or taken into account in determining the amount of the
"initial payments," the "total contract price," or the "selling price." The term "initial
payments" contemplates at least one other payment in addition to the initial payment. If
the entire purchase price is to be paid in a lump sum in a later year, there being no
payment during the year, the income may not be returned on the installment basis.
Income may not be returned on the installment basis where no payment in cash or
property, other than evidences of indebtedness of the purchaser, is received during the
first year, the purchaser having promised to make two or more payments, in later
years.
Petitioner asserts that Sec. 43 allows him to return as income in the taxable years involved, the
respective installments as provided by the deed of sale between him and AYALA. Consequently,
he religiously reported his yearly income from sale of capital asset, subject to tax, as follows:
Year 1977 (50% of P461,754) P230,877.00
1978 230,877.00
1979 230,877.00
1980 230,877.00
Petitioner says that his tax declarations are acceptable modes of payment under Section 175 of
the Revenue Regulations (RR) No. 2. The term "initial payment", he argues, does not include
amounts received by the vendor which are part of the complete purchase price, still due and
payable in subsequent years. Thus, the proceeds of the promissory notes, not yet due which he
discounted to AYALA should not be included as income realized in 1976. Petitioner states that the
original agreement in the Deed of Sale should not be affected by the subsequent discounting of
the bill.
On the other hand, respondents assert that taxation is a matter of substance and not of form.
Returns are scrutinized to determine if transactions are what they are and not declared to evade
taxes. Considering the progressive nature of our income taxation, when income is spread over
several installment payments through the years, the taxable income goes down and the tax due
correspondingly decreases. When payment is in lump sum the tax for the year proportionately
increases. Ultimately, a declaration that a sale is on installment diminishes government taxes for
the year of initial installment as against a declaration of cash sale where taxes to the government
is larger.
As a general rule, the whole profit accruing from a sale of property is taxable as income in the year
the sale is made. But, if not all of the sale price is received during such year, and a statute
provides that income shall be taxable in the year in which it is "received," the profit from an
installment sale is to be apportioned between or among the years in which such installments are
paid and received.13
Sec. 43 and Sec. 175 says that among the entities who may use the above-mentioned installment
method is a seller of real property who disposes his property on installment, provided that the initial
payment does not exceed 25% of the selling price. They also state what may be regarded as
installment payment and what constitutes initial payment. Initial payment means the payment
received in cash or property excluding evidences of indebtedness due and payable in subsequent
years, like promissory notes or mortgages, given of the purchaser during the taxable year of sale.
Initial payment does not include amounts received by the vendor in the year of sale from the
disposition to a third person of notes given by the vendee as part of the purchase price which are
due and payable in subsequent years. 14 Such disposition or discounting of receivable is material
only as to the computation of the initial payment. If the initial payment is within 25% of total
contract price, exclusive of the proceeds of discounted notes, the sale qualifies as an installment
sale, otherwise it is a deferred sale.15
Although the proceed of a discounted promissory note is not considered part of the initial payment,
it is still taxable income for the year it was converted into cash. The subsequent payments or
liquidation of certificates of indebtedness is reported using the installment method in computing the
proportionate income16 to be returned, during the respective year it was realized. Non-dealer sales
of real or personal property may be reported as income under the installment method provided that
the obligation is still outstanding at the close of that year. If the seller disposes the entire
installment obligation by discounting the bill or the promissory note, he necessarily must report the
balance of the income from the discounting not only income from the initial installment payment.
Where an installment obligation is discounted at a bank or finance company, a taxable disposition
results, even if the seller guarantees its payment, continues to collect on the installment obligation,
or handles repossession of merchandise in case of default. 17 This rule prevails in the United
States.18 Since our income tax laws are of American origin,19 interpretations by American courts an
our parallel tax laws have persuasive effect on the interpretation of these laws. 20 Thus, by analogy,
all the more would a taxable disposition result when the discounting of the promissory note is done
by the seller himself. Clearly, the indebtedness of the buyer is discharged, while the seller acquires
money for the settlement of his receivables. Logically then, the income should be reported at the
time of the actual gain. For income tax purposes, income is an actual gain or an actual increase of
wealth.21 Although the proceeds of a discounted promissory note is not considered initial payment,
still it must be included as taxable income on the year it was converted to cash. When petitioner
had the promissory notes covering the succeeding installment payments of the land issued by
AYALA, discounted by AYALA itself, on the same day of the sale, he lost entitlement to report the
sale as a sale on installment since, a taxable disposition resulted and petitioner was required by
law to report in his returns the income derived from the discounting. What petitioner did is
tantamount to an attempt to circumvent the rule on payment of income taxes gained from the sale
of the land to AYALA for the year 1976.
Lastly, petitioner questions the damages awarded to respondent Larin.
Any person who seeks to be awarded actual or compensatory damages due to acts of another has
the burden of proving said damages as well as the amount thereof. 22 Larin says the extortion cases
filed against him hampered his immediate promotion, caused him strong anxiety and social
humiliation. The trial court awarded him two hundred thousand (P200,000,00) pesos as actual
damages. However, the appellate court stated that, despite pendency of this case, Larin was given
a promotion at the BIR. Said respondent court:
We find nothing on record, aside from defendant-appellee Larin's statements (TSN, pp.
6-7, 11 December 1985), to show that he suffered loss of seniority that allegedly barred
his promotion. In fact, he was promoted to his present position despite the pendency of
the instant case (TSN, pp. 35-39, 04 November 1985). 23
Moreover, the records of the case contain no statement whatsoever of the amount of the actual
damages sustained by the respondents. Actual damages cannot be allowed unless supported by
evidence on the record.24 The court cannot rely on speculation, conjectures or guesswork as to the
fact and amount of damages.25 To justify a grant of actual or compensatory damages, it is
necessary to prove with a reasonable degree of certainty, the actual amount of loss. 26 Since we
have no basis with which to assess, with certainty, the actual or compensatory damages counter-
claimed by respondent Larin, the award of such damages should be deleted.
Moral damages may be recovered in cases involving acts referred to in Article 21 27 of the Civil
Code.28 As a rule, a public official may not recover damages for charges of falsehood related to his
official conduct unless he proves that the statement was made with actual malice.
In Babst, et. al. vs. National Intelligence Board, et. al., 132 SCRA 316, 330 (1984), we reiterated
the test for actual malice as set forth in the landmark American case of New York Times
vs. Sullivan,29 which we have long adopted, in defamation and libel cases, viz.:
. . . with knowledge that it was false or with reckless disregard of whether it was false
or not.
We appreciate petitioner's claim that he filed his 1976 return in good faith and that he had honestly
believed that the law allowed him to declare the sale of the land, in installment. We can further
grant that the pertinent tax laws needed construction, as we have earlier done. That petitioner was
offended by the headlines alluding to him as tax evader is also fully understandable. All these,
however, do not justify what amounted to a baseless prosecution of respondent Larin. Petitioner
presented no evidence to prove Larin extorted money from him. He even admitted that he never
met nor talked to respondent Larin. When the tax investigation against the petitioner started, Larin
was not yet the Regional Director of BIR Region IV-A, Manila. On respondent Larin's instruction,
petitioner's tax assessment was considered one involving a sale of capital asset, the income from
which was subjected to only fifty percent (50%) assessment, thus reducing the original tax
assessment by half. These circumstances may be taken to show that Larin's involvement in
extortion was not indubitable. Yet, petitioner went on to file the extortion cases against Larin in
different fora. This is where actual malice could attach on petitioner's part. Significantly, the trial
court did not err in dismissing petitioner's complaints, a ruling affirmed by the Court of Appeals.
Keeping all these in mind, we are constrained to agree that there is sufficient basis for the award of
moral and exemplary damages in favor of respondent Larin. The appellate court believed
respondent Larin when he said he suffered anxiety and humiliation because of the unfounded
charges against him. Petitioner's actions against Larin were found "unwarranted and baseless,"
and the criminal charges filed against him in the Tanodbayan and City Fiscal's Office were all
dismissed.30 Hence, there is adequate support for respondent court's conclusion that moral
damages have been proved.
Now, however, what would be a fair amount to be paid as compensation for moral damages also
requires determination. Each case must be governed by its own peculiar circumstances. 31 On this
score, Del Rosario vs. Court of Appeals,32 cites several cases where no actual damages were
adjudicated, and where moral and exemplary damages were reduced for being "too excessive,"
thus:
In the case of PNB v. C.A., [256 SCRA 309 (1996)], this Court quoted with approval the
following observation from RCPI v. Rodriguez, viz:
** **. Nevertheless, we find the award of P100,000.00 as moral damages in
favor of respondent Rodriguez excessive and unconscionable. In the case
of Prudenciado v. Alliance Transport System,Inc. (148 SCRA 440 [1987])
we said: . . . [I]t is undisputed that the trial courts are given discretion to
determine the amount of moral damages (Alcantara v. Surro, 93 Phil. 472)
and that the Court of Appeals can only modify or change the amount
awarded when they are palpably and scandalously excessive "so as to
indicate that it was the result of passion, prejudice or corruption on the part
of the trial court" (Gellada v. Warner Barnes & Co., Inc., 57 O.G. [4] 7347,
7358; Sadie v. Bacharach Motors Co., Inc., 57 O.G. [4] 636 and Adone v.
Bacharach Motor Co., Inc., 57 O.G. 656). But in more recent cases where
the awards of moral and exemplary damages are far too excessive
compared to the actual loses sustained by the aggrieved party, this Court
ruled that they should be reduced to more reasonable amounts. . . . .
(Emphasis ours.)
 In other words, the moral damages awarded must be commensurate with
the loss or injury suffered.

In the same case (PNB v. CA), this Court found the amount of exemplary damages
required to be paid (P1,000,000,00) "too excessive" and reduced it to an "equitable
level" (P25,000.00).

It will be noted that in above cases, the parties who were awarded moral damages were not public
officials. Considering that here, the award is in favor of a government official in connection with his COMMISSIONER OF INTERNAL G.R. No. 159647
official function, it is with caution that we affirm granting moral damages, for it might open the REVENUE,
floodgates for government officials counter-claiming damages in suits filed against them in Petitioner, Present:
connection with their functions. Moreover, we must be careful lest the amounts awarded make Pang
citizens hesitate to expose corruption in the government, for fear of lawsuits from vindictive aniban, J.,
government officials. Thus, conformably with our declaration that moral damages are not intended Chairman,
to enrich anyone,33 we hereby reduce the moral damages award in this case from two hundred Sandoval-Gutierrez,
thousand (P200,000.00) pesos to seventy five thousand (P75,000.00) pesos, while the exemplary - versus - Corona,
damage is set at P25,000.00 only. Carpio Morales, and
Garcia, JJ
CENTRAL LUZON DRUG Promulgated:
The law allows the award of attorney's fees when exemplary damages are awarded, and when the CORPORATION,
party to a suit was compelled to incur expenses to protect his interest. 34 Though government Respondent. April 15, 2005
officers are usually represented by the Solicitor General in cases connected with the performance x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x
of official functions, considering the nature of the charges, herein respondent Larin was compelled
to hire a private lawyer for the conduct of his defense as well as the successful pursuit of his
counterclaims. In our view, given the circumstances of this case, there is ample ground to award in DECISION
his favor P50,000,00 as reasonable attorney's fees.

WHEREFORE, the assailed decision of the Court of Appeals dated November 29, 1991, is hereby PANGANIBAN, J.:
AFFIRMED with MODIFICATION so that the award of actual damages are deleted; and that
petitioner is hereby ORDERED to pay to respondent Larin moral damages in the amount of
P75,000.00, exemplary damages in the amount of P25,000.00, and attorney's fees in the amount
of P50,000.00 only.1wphi1.nt
he 20 percent discount required by the law to be given to senior citizens is a tax credit, not

No pronouncement as to costs.
merely a tax deduction from the gross income or gross sale of the establishment concerned.
SO ORDERED.
T
A tax credit is used by a private establishment only after the tax has been computed; a tax

deduction, before the tax is computed. RA 7432 unconditionally grants a tax credit to all covered

entities. Thus, the provisions of the revenue regulation that withdraw or modify such grant are void.

Basic is the rule that administrative regulations cannot amend or revoke the law.

The Case
 compliance with [R.A.] 7432. Unable to obtain affirmative response from
petitioner, respondent elevated its claim to the Court of Tax Appeals [(CTA
or Tax Court)] via a Petition for Review.

On February 12, 2001, the Tax Court rendered a Decision[5] dismissing

respondents Petition for lack of merit. In said decision, the [CTA] justified its
Before us is a Petition for Review [1] under Rule 45 of the Rules of Court, seeking to set
ruling with the following ratiocination:

x x x, if no tax has been paid to the government,

aside the August 29, 2002 Decision [2] and the August 11, 2003 Resolution [3] of the Court of Appeals erroneously or illegally, or if no amount is due and
collectible from the taxpayer, tax refund or tax credit
is unavailing. Moreover, whether the recovery of the
(CA) in CA-GR SP No. 67439. The assailed Decision reads as follows: tax is made by means of a claim for refund or tax
credit, before recovery is allowed[,] it must be first
WHEREFORE, premises considered, the Resolution appealed established that there was an actual collection and
from is AFFIRMED in toto. No costs.[4] receipt by the government of the tax sought to be
recovered. x x x.
xxxxxxxxx

Prescinding from the above, it could logically be

deduced that tax credit is premised on the existence
of tax liability on the part of taxpayer. In other words,
The assailed Resolution denied petitioners Motion for Reconsideration. if there is no tax liability, tax credit is not available.

Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed

resolution,[6] granted respondents motion for reconsideration and ordered
herein petitioner to issue a Tax Credit Certificate in favor of respondent
citing the decision of the then Special Fourth Division of [the CA] in CA
G.R. SP No. 60057 entitled Central [Luzon] Drug Corporation vs.
Commissioner of Internal Revenue promulgated on May 31, 2001, to wit:

However, Sec. 229 clearly does not apply in the

The Facts
instant case because the tax sought to be refunded
or credited by petitioner was not erroneously paid or
illegally collected. We take exception to the CTAs
sweeping but unfounded statement that both tax
refund and tax credit are modes of recovering taxes
which are either erroneously or illegally paid to the
The CA narrated the antecedent facts as follows: government. Tax refunds or credits do not
exclusively pertain to illegally collected or
Respondent is a domestic corporation primarily engaged in retailing of erroneously paid taxes as they may be other
medicines and other pharmaceutical products. In 1996, it operated six (6) circumstances where a refund is warranted. The tax
drugstores under the business name and style Mercury Drug. refund provided under Section 229 deals exclusively
with illegally collected or erroneously paid taxes but
From January to December 1996, respondent granted twenty (20%) there are other possible situations, such as the
percent sales discount to qualified senior citizens on their purchases of refund of excess estimated corporate quarterly
medicines pursuant to Republic Act No. [R.A.] 7432 and its Implementing income tax paid, or that of excess input tax paid by
Rules and Regulations. For the said period, the amount allegedly a VAT-registered person, or that of excise tax paid
representing the 20% sales discount granted by respondent to qualified on goods locally produced or manufactured but
senior citizens totaled P904,769.00. actually exported. The standards and mechanics for
the grant of a refund or credit under these situations
On April 15, 1997, respondent filed its Annual Income Tax Return for are different from that under Sec. 229. Sec. 4[.a)] of
taxable year 1996 declaring therein that it incurred net losses from its R.A. 7432, is yet another instance of a tax credit
operations. and it does not in any way refer to illegally collected
or erroneously paid taxes, x x x.[7]
On January 16, 1998, respondent filed with petitioner a claim for tax
refund/credit in the amount of P904,769.00 allegedly arising from the 20%
sales discount granted by respondent to qualified senior citizens in
 Whether the Court of Appeals erred in holding that respondent may claim
the 20% sales discount as a tax credit instead of as a deduction from gross
income or gross sales.

Whether the Court of Appeals erred in holding that respondent is entitled to

a refund.[9]

These two issues may be summed up in only one: whether respondent, despite incurring a net
Ruling of the Court of Appeals

loss, may still claim the 20 percent sales discount as a tax credit.

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to

The Courts Ruling

issue a tax credit certificate in favor of respondent in the reduced amount of P903,038.39. It

The Petition is not meritorious.

reasoned that Republic Act No. (RA) 7432 required neither a tax liability nor a payment of taxes by

private establishments prior to the availment of a tax credit. Moreover, such credit is not
Sole Issue:
Claim of 20 Percent Sales Discount
tantamount to an unintended benefit from the law, but rather a just compensation for the taking of as Tax Credit Despite Net Loss

private property for public use.

Section 4a) of RA 7432 [10] grants to senior citizens the privilege of obtaining a 20 percent discount

Hence this Petition.[8]

on their purchase of medicine from any private establishment in the country. [11] The latter may then

The Issues claim the cost of the discount as a tax credit.[12] But can such credit be claimed, even though an

establishment operates at a loss?

Petitioner raises the following issues for our consideration:

We answer in the affirmative. that is subject to tax [22] in order to arrive at taxable income.[23] To think of the former as the latter is

to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been
Tax Credit versus
Tax Deduction
computed; a tax deduction, before.

Tax Liability Required

Although the term is not specifically defined in our Tax Code, [13] tax credit generally refers to an for Tax Credit

amount that is subtracted directly from ones total tax liability. [14] It is an allowance against the tax

itself[15] or a deduction from what is owed [16] by a taxpayer to the government. Examples of tax Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax

credits are withheld taxes, payments of estimated tax, and investment tax credits. [17] liability before the tax credit can be applied. Without that liability, any tax credit application will be

useless. There will be no reason for deducting the latter when there is, to begin with, no existing

Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -- obligation to the government. However, as will be presented shortly, the existence of a tax credit or

defined as a subtraction from income for tax purposes, [18] or an amount that is allowed by law to its grant by law is not the same as the availment or use of such credit. While the grant is

reduce income prior to [the] application of the tax rate to compute the amount of tax which is due. mandatory, the availment or use is not.

[19]
An example of a tax deduction is any of the allowable deductions enumerated in Section 34 [20] of

the Tax Code. If a net loss is reported by, and no other taxes are currently due from, a business establishment,

there will obviously be no tax liability against which any tax creditcan be applied.[24] For the

A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, establishment to choose the immediate availment of a tax credit will be premature and

including -- whenever applicable -- the income tax that is determined after applying the impracticable. Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has

corresponding tax rates to taxable income.[21] A tax deduction, on the other, reduces the income granted without conditions a tax credit benefit to all covered establishments.
 tax due. The tax credits in both instances allude to the prior payment of taxes, even if not made to

Although this tax credit benefit is available, it need not be used by losing ventures, since there is our government.

no tax liability that calls for its application. Neither can it be reduced to nil by the quick yet callow

stroke of an administrative pen, simply because no reduction of taxes can instantly be effected. By Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions --

its nature, the tax creditmay still be deducted from a future, not a present, tax liability, without whether or not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of

which it does not have any use. In the meantime, it need not move. But it breathes. any input tax not directly attributable to either activity. This input tax may either be the VAT on the

purchase or importation of goods or services that is merely due from -- not necessarily paid by --
Prior Tax Payments Not
Required for Tax Credit
such VAT-registered person in the course of trade or business; or the transitional input tax

determined in accordance with Section 111(A). The latter type may in fact be an amount equivalent

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not.
to only eight percent of the value of a VAT-registered persons beginning inventory of goods,

On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax
materials and supplies, when such amount -- as computed -- is higher than the actual VAT paid on

payment is needed. The Tax Code is in fact replete with provisions granting or allowing tax credits,
the said items.[25]Clearly from this provision, the tax credit refers to an input tax that is either due

even though no taxes have been previously paid.

only or given a value by mere comparison with the VAT actually paid -- then later prorated. No tax

is actually paid prior to the availment of such credit.

For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain

limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is a similar
In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed.

provision for donors taxes -- again when paid to a foreign country -- in computing for the donors
For the purchase of primary agricultural products used as inputs -- either in the processing of

sardines, mackerel and milk, or in the manufacture of refined sugar and cooking oil -- and for the
contract price of public work contracts entered into with the government, again, no prior tax foreign tax credit will be given by the domiciliary country in an amount equivalent to taxes that are

payments are needed for the use of the tax credit. merely deemed paid.[27] Although true, this provision actually refers to the tax credit as

a condition only for the imposition of a lower tax rate, not as a deductionfrom the corresponding tax

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may, liability. Besides, it is not our government but the domiciliary country that credits against the

under Section 112(A), apply for the issuance of a tax creditcertificate for the amount of creditable income tax payable to the latter by the foreign corporation, the tax to be foregone or spared. [28]

input taxes merely due -- again not necessarily paid to -- the government and attributable to such

sales, to the extent that the input taxes have not been applied against output taxes. [26] Where a In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits,

taxpayer against the income tax imposable under Title II, the amount of income taxes merely incurred -- not

is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the necessarily paid -- by a domestic corporation during a taxable year in any foreign country.

amount of creditable input taxes due that are not directly and entirely attributable to any one of Moreover, Section 34(C)(5) provides that for such taxes incurred but not paid, a tax credit may be

these transactions shall be proportionately allocated on the basis of the volume of sales. Indeed, in allowed, subject to the condition precedent that the taxpayer shall simply give a bond with sureties

availing of such tax credit for VAT purposes, this provision -- as well as the one earlier mentioned -- satisfactory to and approved by petitioner, in such sum as may be required; and further

shows that the prior payment of taxes is not a requisite. conditioned upon payment by the taxpayer of any tax found due, upon petitioners redetermination

of it.

It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax

credit allowed, even though no prior tax payments are not required. Specifically, in this provision, In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special

the imposition of a final withholding tax rate on cash and/or property dividends received by a laws that grant or allow tax credits, even though no prior tax payments have been made.

nonresident foreign corporation from a domestic corporation is subjected to the condition that a
Under the treaties in which the tax credit method is used as a relief to avoid double periods, and even their application against internal revenue taxes, did not necessitate the

taxation, income that is taxed in the state of source is also taxable in the state of residence, but the existence of a tax liability.

tax paid in the former is merely allowed as a credit against the tax levied in the latter. [29] Apparently,

payment is made to the state of source, not the state of residence. No tax, therefore, has The examples above show that a tax liability is certainly important in the availment or use, not

been previously paid to the latter. the existence or grant, of a tax credit. Regarding this matter, a private establishment reporting

a net loss in its financial statements is no different from another that presents a net income. Both

Under special laws that particularly affect businesses, there can also be tax credit incentives. To are entitled to the tax credit provided for under RA 7432, since the law itself accords that

illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as unconditional benefit. However, for the losing establishment to immediately apply such credit,

amended by Batas Pambansa Blg. (BP) 391, include tax credits equivalent to either five percent of where no tax is due, will be an improvident usance.

the net value earned, or five or ten percent of the net local content of exports. [30] In order to avail of
Sections 2.i and 4 of Revenue
Regulations No. 2-94 Erroneous
such credits under the said law and still achieve its objectives, no prior tax payments are

necessary.

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts

they grant.[33] In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide
From all the foregoing instances, it is evident that prior tax payments are not indispensable to the

the procedures for its availment. [34] To deny such credit, despite the plain mandate of the law and
availment of a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not

the regulations carrying out that mandate, is indefensible.

require prior tax payments by private establishments concerned. [31] However, we do not agree with

its finding[32] that the carry-over of tax credits under the said special law to succeeding taxable
First, the definition given by petitioner is erroneous. It refers to tax credit as the amount the part of the seller and a purchase discount on the part of the buyer, it may be expressed in

representing the 20 percent discount that shall be deducted by the said establishments from such

their gross income for income tax purposes and from their gross sales for value-added tax or other terms as 5/10, n/30.[42]

percentage tax purposes.[35] In ordinary business language, the tax credit represents the amount of

such discount. However, the manner by which the discount shall be credited against taxes has not A quantity discount, however, is a reduction in price allowed for purchases made in large

been clarified by the revenue regulations. quantities, justified by savings in packaging, shipping, and handling. [43] It is also called

a volume or bulk discount.[44]

By ordinary acceptation, a discount is an abatement or reduction made from the gross amount or

value of anything.[36] To be more precise, it is in business parlance a deduction or lowering of an A percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by

amount of money;[37] or a reduction from the full amount or value of something, especially a price. wholesalers to retailers[45] is known as a trade discount. No entry for it need be made in the manual

[38]
In business there are many kinds of discount, the most common of which is that affecting or computerized books of accounts, since the purchase or sale is already valued at the net price

the income statement[39] or financial report upon which the income tax is based. actually charged the buyer. [46] The purpose for the discount is to encourage trading or increase

sales, and the prices at which the purchased goods may be resold are also suggested. [47] Even
Business Discounts
Deducted from Gross Sales
a chain discount -- a series of discounts from one list price -- is recorded at net.[48]

A cash discount, for example, is one granted by business establishments to credit customers for
Finally, akin to a trade discount is a functional discount. It is a suppliers price discount given to a

their prompt payment.[40] It is a reduction in price offered to the purchaser if payment is made within
purchaser based on the [latters] role in the [formers] distribution system. [49] This role usually

a shorter period of time than the maximum time specified. [41] Also referred to as a sales discount on
involves warehousing or advertising.
 The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to

Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally amounts whose sum -- along with sales returns, allowances and cost of goods sold[56] -- is

accepted accounting principles (GAAP) in the country, this type of discount is reflected in deducted from gross sales to come up with the gross income, profit or margin[57] derived from

the income statement[50] as a line item deducted -- along with returns, allowances, rebates and business.[58] In another provision therein, sales discounts that are granted and indicated in the

other similar expenses -- from gross sales to arrive at net sales.[51] This type of presentation is invoices at the time of sale -- and that do not depend upon the happening of any future event --

resorted to, because the accounts receivable and sales figures that arise from sales discounts, -- may be excluded from the gross sales within the same quarter they were given. [59] While

as well as from quantity, volume or bulk discounts -- are recorded in the manual and determinative only of the VAT, the latter provision also appears as a suitable reference point for

computerized books of accounts and reflected in the financial statements at the gross amounts of income tax purposes already embraced in the former. After all, these two provisions affirm

the invoices.[52] This manner of recording credit sales -- known as the gross method -- is most that sales discounts are amounts that are always deductible from gross sales.

widely used, because it is simple, more convenient to apply than the net method, and produces no
Reason for the Senior Citizen Discount:
The Law, Not Prompt Payment
material errors over time.[53]

A distinguishing feature of the implementing rules of RA 7432 is the private establishments outright
However, under the net method used in recording trade, chain or functional discounts, only the net

deduction of the discount from the invoice price of the medicine sold to the senior citizen. [60] It is,
amounts of the invoices -- after the discounts have been deducted -- are recorded in the books of

therefore, expected that for each retail sale made under this law, the discount period lasts no more
accounts[54] and reflected in the financial statements. A separate line item cannot be shown,

than a day, because such discount is given -- and the net amount thereof collected -- immediately
[55]
because the transactions themselves involving both accounts receivable and sales have

upon perfection of the sale.[61] Although prompt payment is made for an arms-length transaction by
already been entered into, net of the said discounts.
the senior citizen, the real and compelling reason for the private establishment giving the discount its tax credit benefit. While the former is a deduction before, the latter is a deduction after,

is that the law itself makes it mandatory. the income tax is computed. As mentioned earlier, a discount is not necessarily a sales discount,

and a tax credit for a simple discount privilege should not be automatically treated like a sales

What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish,

the above discounts in particular. Prompt payment is not the reason for (although a necessary we ought not to distinguish.

consequence of) such grant. To be sure, the privilege enjoyed by the senior citizen must be

equivalent to the tax credit benefit enjoyed by the private establishment granting the discount. Yet, Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent

under the revenue regulations promulgated by our tax authorities, this benefit has been discount deductible from gross income for income tax purposes, or from gross sales for VAT or

erroneously likened and confined to a sales discount. other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales

discount. This contrived definition is improper, considering that the latter has to be deducted

To a senior citizen, the monetary effect of the privilege may be the same as that resulting from from gross sales in order to compute the gross income in the income statement and cannot be

a sales discount. However, to a private establishment, the effect is different from a simple deducted again, even for purposes of computing the income tax.

reduction in price that results from such discount. In other words, the tax credit benefit is not the

same as a sales discount. To repeat from our earlier discourse, this benefit cannot and should not When the law says that the cost of the discount may be claimed as a tax credit, it means that the

be treated as a tax deduction. amount -- when claimed -- shall be treated as a reduction from any tax liability, plain and simple.

The option to avail of the tax credit benefit depends upon the existence of a tax liability, but to limit

To stress, the effect of a sales discount on the income statement and income tax return of an the benefit to a sales discount-- which is not even identical to the discount privilege that is granted

establishment covered by RA 7432 is different from that resulting from the availment or use of
by law -- does not define it at all and serves no useful purpose. The definition must, therefore, be In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-

stricken down. 94 a meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled up the

intent of Congress in granting a mere discount privilege, not a sales discount. The administrative
Laws Not Amended
by Regulations
agency issuing these regulations may not enlarge, alter or restrict the provisions of the law it

administers; it cannot engraft additional requirements not contemplated by the legislature. [67]

Second, the law cannot be amended by a mere regulation. In fact, a regulation that operates to

create a rule out of harmony with

In case of conflict, the law must prevail. [68] A regulation adopted pursuant to law is law.

the statute is a mere nullity;[62] it cannot prevail.

[69]
Conversely, a regulation or any portion thereof not adopted pursuant to law is no law and has

neither the force nor the effect of law.[70]

It is a cardinal rule that courts will and should respect the contemporaneous construction placed

Availment of Tax
upon a statute by the executive officers whose duty it is to enforce it x x x. [63] In the scheme of Credit Voluntary

judicial tax administration, the need for certainty and predictability in the implementation of tax laws

is crucial.[64] Our tax authorities fill in the details that Congress may not have the opportunity or Third, the word may in the text of the statute [71] implies that the

competence to provide.[65] The regulations these authorities issue are relied upon by taxpayers, availability of the tax credit benefit is neither unrestricted nor mandatory.[72] There is no absolute

who are certain that these will be followed by the courts. [66] Courts, however, will not uphold these right conferred upon respondent, or any similar taxpayer, to avail itself of the tax credit remedy

authorities interpretations when clearly absurd, erroneous or improper. whenever it chooses; neither does it impose a duty on the part of the government to sit back and

allow an important facet of tax collection to be at the sole control and discretion of the taxpayer.

[73]
For the tax authorities to compel respondent to deduct the 20 percent discount from either
its gross income or its gross sales[74] is, therefore, not only to make an imposition without basis in construction is thus applicable x x x. Where the words of a statute are clear, plain and free from

law, but also to blatantly contravene the law itself. ambiguity, it must be given its literal meaning and applied without attempted interpretation. [76]

What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not Tax Credit Benefit
Deemed Just Compensation

imperative. Respondent is given two options -- either to claim or not to claim the cost of the

discounts as a tax credit. In fact, it may even ignore the credit and simply consider the gesture as
Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent

an act of beneficence, an expression of its social conscience.

domain. Be it stressed that the privilege enjoyed by senior citizens does not come directly from the

State, but rather from the private establishments concerned. Accordingly, the tax credit benefit
Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax

granted to these establishments can be deemed as their just compensation for private property
credit can easily be applied. If there is none, the credit cannot be used and will just have to be

taken by the State for public use.[77]

[75]
carried over and revalidated accordingly. If, however, the business continues to operate at a loss

and no other taxes are due, thus compelling it to close shop, the credit can never be applied and

The concept of public use is no longer confined to the traditional notion of use by the public, but
will be lost altogether.

held synonymous with public interest, public benefit, public welfare, and public convenience.[78] The

discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the
In other words, it is the existence or the lack of a tax liability that determines whether the cost of

general public to which these citizens belong. The discounts given would have entered the coffers
the discounts can be used as a tax credit. RA 7432 does not give respondent the unfettered right

and formed part of the gross sales of the private establishments concerned, were it not for RA
to avail itself of the credit whenever it pleases. Neither does it allow our tax administrators to

expand or contract the legislative mandate. The plain meaning rule or verba legis in statutory
7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the While it is a declared commitment under Section 1 of RA 7432, social justice cannot be invoked to

taking of private property for public use or benefit. trample on the rights of property owners who under our Constitution and laws are also entitled to

protection. The social justice consecrated in our [C]onstitution [is] not intended to take away rights

As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just from a person and give them to another who is not entitled thereto. [84] For this reason, a just

compensation. This term refers not only to the issuance of a tax credit certificate indicating the compensation for income that is taken away from respondent becomes necessary. It is in the tax

correct amount of the discounts given, but also to the promptness in its release. Equivalent to the credit that our legislators find support to realize social justice, and no administrative body can alter

payment of property taken by the State, such issuance -- when not done within a reasonable that fact.

time from the grant of the discounts -- cannot be considered as just compensation. In effect,

respondent is made to suffer the consequences of being immediately deprived of its revenues To put it differently, a private establishment that merely breaks even [85] -- without the discounts yet

while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with -- will surely start to incur losses because of such discounts. The same effect is expected if its

the reduction in its revenues.[79] mark-up is less than 20 percent, and if all its sales come from retail purchases by senior citizens.

Aside from the observation we have already raised earlier, it will also be grossly unfair to an

Besides, the taxation power can also be used as an implement for the exercise of the power of establishment if the discounts will be treated merely as deductions from either its gross income or

eminent domain.[80] Tax measures are but enforced contributions exacted on pain of penal its gross sales. Operating at a loss through no fault of its own, it will realize that the tax

sanctions[81] and clearly imposed for a public purpose.[82] In recent years, the power to tax has credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will

indeed become a most effective tool to realize social justice, public welfare, and the equitable be put in a better position if they avail themselves of tax credits denied those that are losing,

distribution of wealth.[83] because no taxes are due from the latter.

Grant of Tax Credit MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting
Intended by the Legislature government and public institutions, so,
puwede na po nating hindi isama yung
mga less deductions ng taxable income.

THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private
hospitals. Yung isiningit natin?
Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the
MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use
the microphone).
community as a whole and to establish a program beneficial to them. [86]These objectives are SEN. ANGARA. Hindi pa, hindi pa.

THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?

consonant with the constitutional policy of making health x x x services available to all the people
SEN. ANGARA. Oo. You want to insert that?

at affordable cost[87] and of giving priority for the needs of the x x x elderly. [88] Sections 2.i and 4 of THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.

SEN. ANGARA. In the case of private hospitals they got the grant of 15%
RR 2-94, however, contradict these constitutional policies and statutory objectives. discount, provided that, the private
hospitals can claim the expense as a tax
credit.

REP. AQUINO. Yah could be allowed as deductions in the perpetrations of

(inaudible) income.

Furthermore, Congress has allowed all private establishments a simple tax credit, not a deduction. SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?

REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng

In fact, no cash outlay is required from the government for the availment or use of such credit. The establishments na covered.

THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals

deliberations on February 5, 1992 of the Bicameral Conference Committee Meeting on Social lang.

REP. AQUINO. Ano ba yung establishments na covered?

Justice, which finalized RA 7432, disclose the true intent of our legislators to treat the sales
SEN. ANGARA. Restaurant lodging houses, recreation centers.

REP. AQUINO. All establishments covered siguro?

discounts as a tax credit, rather than as a deduction from gross income. We quote from those
SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung
ganon. Can we go back to Section 4
deliberations as follows: ha?

"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about REP. AQUINO. Oho.
deductions from taxable income. I think
we incorporated there a provision na - SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of
on the responsibility of the private 20% discount from all establishments et
hospitals and drugstores, hindi ba? cetera, et cetera, provided that said
establishments - provided that private
SEN. ANGARA. Oo. establishments may claim the cost as a
tax credit. Ganon ba 'yon?
THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a
provision here about the deductions REP. AQUINO. Yah.
from taxable income of that private
hospitals, di ba ganon 'yan? SEN. ANGARA. Dahil kung government, they don't need to claim it.
 THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay. RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the

REP. AQUINO Okay.

Tax Code -- a later law. When the former states that a tax creditmay be claimed, then the
SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A". [89]

requirement of prior tax payments under certain provisions of the latter, as discussed above,

Special Law
Over General Law cannot be made to apply. Neither can the instances of or references to a tax deduction under the

Tax Code[94] be made to restrict RA 7432. No provision of any revenue regulation can supplant or

Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law. x x modify the acts of Congress.

x [T]he rule is that on a specific matter the special law shall prevail over the general law, which

shall WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court

be resorted to only to supply deficiencies in the former. [90] In addition, [w]here there are two of Appeals AFFIRMED. No pronouncement as to costs.

statutes, the earlier special and the later general -- the terms of the general broad enough to

include the matter provided for in the special -- the fact that one is special and the other is general SO ORDERED.

creates a presumption that the special is to be considered as remaining an exception to the

general,[91] one as a general law of the land, the other as the law of a particular case. [92] It is a

canon of statutory construction that a later statute, general in its terms and not expressly repealing

a prior special statute, will ordinarily not affect the special provisions of such earlier statute. [93]
 Pursuant to Revenue Regulations No. 2-941 implementing R.A. No. 7432, which states that the
discount given to senior citizens shall be deducted by the establishment from its gross sales for
value-added tax and other percentage tax purposes, respondent deducted the total amount
of P219,778 from its gross income for the taxable year 1995. For said taxable period, respondent
reported a net loss of P20,963 in its corporate income tax return. As a consequence, respondent
did not pay income tax for 1995.

Subsequently, on December 27, 1996, claiming that according to Sec. 4(a) of R.A. No. 7432, the
amount of P219,778 should be applied as a tax credit, respondent filed a claim for refund in the
amount of P150,193, thus:

Net Sales P 37,014,807.00

Add: Cost of 20% Discount to Senior Citizens 219,778.00

Gross Sales P 37,234,585.00

Less: Cost of Sales

G.R. No. 148512 June 26, 2006 Merchandise Inventory, beg P 1,232,740.00

Purchases 41,145,138.00
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs. 8,521,557.00 33,856,621.00
CENTRAL LUZON DRUG CORPORATION, Respondent. Merchandise Inventory, end

DECISION Gross Profit P 3,377,964.00

Miscellaneous Income 39,014.00

AZCUNA, J.:

This is a petition for review under Rule 45 of the Rules of Court seeking the nullification of the Total Income 3,416,978.00
Decision, dated May 31, 2001, of the Court of Appeals (CA) in CA-G.R. SP No. 60057, entitled
"Central Luzon Drug Corporation v. Commissioner of Internal Revenue," granting herein Operating Expenses 3,199,230.00
respondent Central Luzon Drug Corporations claim for tax credit equal to the amount of the 20%
discount that it extended to senior citizens on the latters purchase of medicines pursuant to
Section 4(a) of Republic Act (R.A.) No. 7432, entitled "An Act to Maximize the Contribution of
Net Income Before Tax P 217,748.00
Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for other Purposes"
otherwise known as the Senior Citizens Act.
Income Tax (35%) 69,585.00

The antecedents are as follows: Less: Tax Credit

(Cost of 20% Discount to Senior Citizens) 219,778.00

Central Luzon Drug Corporation has been a retailer of medicines and other pharmaceutical
products since December 19, 1994. In 1995, it opened three (3) drugstores as a franchisee under
the business name and style of "Mercury Drug."
Income Tax Payable (P 150,193.00)

For the period January 1995 to December 1995, in conformity to the mandate of Sec. 4(a) of R.A. Income Tax Actually Paid -0-
No. 7432, petitioner granted a 20% discount on the sale of medicines to qualified senior citizens
amounting to P219,778. Tax Refundable/Overpaid Income Tax (P 150,193.00)
As shown above, the amount of P150,193 claimed as a refund represents the tax credit allegedly
due to respondent under R.A. No. 7432. Since the Commissioner of Internal Revenue "was not
able to decide the claim for refund on time," 2 respondent filed a Petition for Review with the Court
of Tax Appeals (CTA) on March 18, 1998.
On April 24, 2000, the CTA dismissed the petition, declaring that even if the law treats the 20%
sales discounts granted to senior citizens as a tax credit, the same cannot apply when there is no
tax liability or the amount of the tax credit is greater than the tax due. In the latter case, the tax
credit will only be to the extent of the tax liability. 3Also, no refund can be granted as no tax was
erroneously, illegally and actually collected based on the provisions of Section 230, now Section
229, of the Tax Code. Furthermore, the law does not state that a refund can be claimed by the
private establishment concerned as an alternative to the tax credit.
Thus, respondent filed with the CA a Petition for Review on August 3, 2000.
On May 31, 2001, the CA rendered a Decision stating that Section 229 of the Tax Code does not
apply in this case. It concluded that the 20% discount given to senior citizens which is treated as a
tax credit pursuant to Sec. 4(a) of R.A. No. 7432 is considered just compensation and, as such,
may be carried over to the next taxable period if there is no current tax liability. In view of this, the
CA held:
WHEREFORE, the instant petition is hereby GRANTED and the decision of the CTA dated 24 April
2000 and its resolution dated 06 July 2000 are SET ASIDE. A new one is entered granting
petitioners claim for tax credit in the amount of Php: 150,193.00. No costs.
SO ORDERED.4
Hence, this petition raising the sole issue of whether the 20% sales discount granted by
respondent to qualified senior citizens pursuant to Sec. 4(a) of R.A. No. 7432 may be claimed as a
tax credit or as a deduction from gross sales in accordance with Sec. 2(1) of Revenue Regulations
No. 2-94.
Sec. 4(a) of R.A. No. 7432 provides:
Sec. 4. Privileges for the Senior citizens. The senior citizens shall be entitled to the following:
(a) the grant of twenty percent (20%) discount from all establishments relative to utilization of
transportations services, hotels and similar lodging establishments, restaurants and recreation
centers and purchase of medicines anywhere in the country: Provided, That private establishments
may claim the cost as tax credit.
The CA and the CTA correctly ruled that based on the plain wording of the law discounts given
under R.A. No. 7432 should be treated as tax credits, not deductions from income.
It is a fundamental rule in statutory construction that the legislative intent must be determined from
the language of the statute itself especially when the words and phrases therein are clear and
unequivocal. The statute in such a case must be taken to mean exactly what it says. 5 Its literal
meaning should be followed;6 to depart from the meaning expressed by the words is to alter the
statute.7
The above provision explicitly employed the word "tax credit." Nothing in the provision suggests for
it to mean a "deduction" from gross sales. To construe it otherwise would be a departure from the
clear mandate of the law.
Thus, the 20% discount required by the Act to be given to senior citizens is a tax credit, not a
deduction from the gross sales of the establishment concerned. As a corollary to this, the definition
of tax credit found in Section 2(1) of Revenue Regulations No. 2-94 is erroneous as it refers to tax
credit as the amount representing the 20% discount that "shall be deducted by the said
establishment from their gross sales for value added tax and other percentage tax purposes." This
definition is contrary to what our lawmakers had envisioned with regard to the treatment of the
discount granted to senior citizens.
Accordingly, when the law says that the cost of the discount may be claimed as a tax credit, it
means that the amount -- when claimed shall be treated as a reduction from any tax liability. 8 The
law cannot be amended by a mere regulation. The administrative agencies issuing these
regulations may not enlarge, alter or restrict the provisions of the law they administer. 9 In fact, a
regulation that "operates to create a rule out of harmony with the statute is a mere nullity." 10
Finally, for purposes of clarity, Sec. 22911 of the Tax Code does not apply to cases that fall under
Sec. 4 of R.A. No. 7432 because the former provision governs exclusively all kinds of refund or
credit of internal revenue taxes that were erroneously or illegally imposed and collected pursuant
to the Tax Code while the latter extends the tax credit benefit to the private establishments
concerned even before tax payments have been made. The tax credit that is contemplated under
the Act is a form of just compensation, not a remedy for taxes that were erroneously or illegally
assessed and collected. In the same vein, prior payment of any tax liability is not a precondition
before a taxable entity can benefit from the tax credit. The credit may be availed of upon payment
of the tax due, if any. Where there is no tax liability or where a private establishment reports a net
loss for the period, the tax credit can be availed of and carried over to the next taxable year.
It must also be stressed that unlike in Sec. 229 of the Tax Code wherein the remedy of refund is
available to the taxpayer, Sec. 4 of the law speaks only of a tax credit, not a refund.
As earlier mentioned, the tax credit benefit granted to the establishments can be deemed as their
just compensation for private property taken by the State for public use. The privilege enjoyed by
the senior citizens does not come directly from the State, but rather from the private
establishments concerned.12
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. SP No.
60057, dated May 31, 2001, is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
 also known as the "Senior Citizens Act," and Revenue Regulations No. 2-94, petitioner granted to
qualified senior citizens a 20% sales discount on their purchase of medicines covering the period
from July 19, 1993 to December 31, 1994.

When petitioner filed its corresponding corporate annual income tax returns for taxable years 1993
and 1994, it claimed as a deduction from its gross income the respective amounts of P80,330
and P515,000 representing the 20% sales discount it granted to senior citizens.

On March 28, 1995, however, alleging error in the computation and claiming that the
aforementioned 20% sales discount should have been treated as a tax credit pursuant to R.A. No.
7432 instead of a deduction from gross income, petitioner filed a claim for refund or credit of
overpaid income tax for 1993 and 1994, amounting to P52,215 and P334,750, respectively.
Petitioner computed the overpayment as follows:

Income tax benefit of tax credit 100%

Income tax benefit of tax deduction 35%

Differential 65%

For 1993
G.R. No. 142299 June 22, 2006

20% discount granted in 1993 P80,330

BICOLANDIA DRUG CORPORATION (FORMERLY ELMAS DRUG COPRORATION), Petitioner,
vs. Multiply by 65% x 65%
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Overpaid corporate income tax P52,215
DECISION

For 1994
AZCUNA, J.:

20% discount granted in 1993 P515,000

This is a petition for review1 by Bicolandia Drug Corporation, formerly known as Elmas Drug
Corporation, seeking the nullification of the Decision and Resolution of the Court of Appeals, dated
Multiply by 65% x 65%
October 19, 1999 and February 18, 2000, respectively, in CA-G.R SP No. 49946 entitled
"Commissioner of Internal Revenue v. Elmas Drug Corporation." Overpaid corporate income tax P334,750

The controversy primarily involves the proper interpretation of the term "cost" in Section 4 of
Republic Act (R.A.) No. 7432, otherwise known as "An Act to Maximize the Contribution of Senior On December 29, 1995, petitioner filed a Petition for Review with the Court of Tax Appeals (CTA)
Citizens to Nation Building, Grant Benefits and Special Privileges and for Other Purposes." in order to toll the running of the two-year prescriptive period for claiming for a tax refund under
Section 230, now Section 229, of the Tax Code.

The facts2 of the case are as follows:

Petitioner Bicolandia Drug Corporation is a domestic corporation principally engaged in the retail of
pharmaceutical products. Petitioner has a drugstore located in Naga City under the name and
business style of "Mercury Drug."
It contended that Section 4 of R.A. No. 7432 provides in clear and unequivocal language that
discounts granted to senior citizens may be claimed as a tax credit. Revenue Regulations No. 2-
94, therefore, which is merely an implementing regulation cannot modify, alter or depart from the
clear mandate of Section 4 of R.A. No. 7432, and, thus, is null and void for being inconsistent with
the very statute it seeks to implement.

Pursuant to the provisions of R.A. No. 7432, entitled "An Act to Maximize the Contribution of The Commissioner of Internal Revenue, on the other hand, maintained that the aforesaid section
Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for Other Purposes," providing for a 20% sales discount to senior citizens is a misnomer as it runs counter to the solemn
duty of the government to collect taxes. The Commissioner likewise pointed out that the provision
Net Sales P31,080,508.00
in question employs the word "may," thereby implying that the availability of the remedy of tax
credit is not absolute and mandatory and it does not confer an absolute right on the taxpayer to Add: 20% Discount to Senior Citizens 80,330.00
avail of the tax credit scheme if he so chooses. The Commissioner further stated that in statutory
construction, the contemporaneous construction of a statute by executive officers of the
government whose duty is to execute it is entitled to great respect and should ordinarily control in
its interpretation. Gross Sales P31,160,838.00

Less: Cost of Sales

Thus, addressing the matter of the proper construction of Section 4(a) of R.A. No. 7432 regarding
the treatment of the 20% sales discount given to senior citizens on their medicine purchases, the Merchandise Inventory, beg. P 4,226,588.00
CTA ruled on the issue of whether or not the discount should be deductible from gross sales of
value-added tax or other percentage tax purposes as prescribed under Revenue Regulations No. Add Purchases 29,234,361.00
2-94 or as a tax credit deductible from the tax due.

In its Decision, dated August 27, 1998, the CTA declared that: Total Goods available for Sale P33,460,947.00

Less: Merchandise Inventory, End P 4,875.944.00 P28,585,003.00

"x x x

Revenue Regulations No. 2-94 gave a new meaning to the phrase "tax credit," interpreting it to Gross Income P 2,575,835.00
mean that the 20% discount granted to qualified senior citizens is an amount deductible from the
establishments gross sales, which is completely contradictory to the literal or widely accepted
meaning of the said phrase, as an amount subtracted from an individuals or entitys tax liability to
arrive at the total tax liability (Blacks Law Dictionary). Less: Operating Expenses 1,706,491.00

Net Operating Income P 869,344.00

In view of such apparent discrepancy in the interpretation of the term "tax credit", the provisions of
the law under R.A. 7432 should prevail over the subordinate regulation issued by the respondent Add: Miscellaneous Income 72,680.00
under Revenue Regulation No. 2-94. x x x

Net Income P 942,024.00

Having settled the legal issue involved in the case at bar, We are now tasked to resolve the factual
issues of whether or not petitioner is entitled to the claim for refund of its overpaid income taxes for
Less: Interest Income Subject to Final Tax 21,140.00
the years 1993 and 1994 based on the evidence at hand.

Contrary to the findings of the independent CPA, aside from the unverifiable 20% sales discounts Net Taxable Income P 920,884.00
in the amount of P18,653.70 (Exh. R-3), the Court noted some material discrepancies. Not all the
details listed in the 1994 "Summary of Sales and Discounts Given to Senior Citizens" correspond Tax Due (P920,884 x 35%) P 322,309.40
with the cash slips presented. There are various sales discounts granted which were not properly
computed and there were also some cash slips left unsigned by the buyers. Less: 1) Tax Credit (Cost of 20% Discount)
[(28,585,003.00/31,160,838.00)
x 80,330.34] P 73,690.03
xxx
2) Income Tax Payment for the Year 294,194.00 P 367,884.03
After a careful scrutiny of the documents presented, the Court, allows only the amount of sales
discounts duly supported by the pre-marked cash slips x x x.
P 45,574.63
AMOUNT REFUNDABLE
Hence, only the above amounts which are properly documented can be used as base in
computing for the cost of 20% discount as tax credit. The overpaid income tax therefore is
computed as follows: 3 For 1994

Net Sales P 29,904,734.00

For 1993
Add: 20% Discount to Senior Citizens 515,000.00
 Both the Commissioner and petitioner moved for a reconsideration of the above decision.
Gross Sales P 30,419,734.00
Petitioner, in its Motion for Partial Reconsideration, claimed that the "cost" that private
establishments may claim as tax credit under Section 4 of R.A. No. 7432 should be construed to
mean the full amount of the 20% sales discount granted to senior citizens instead of the formula --
Less: Cost of Sales [Tax Credit = Cost of Sales/Gross Sales x 20% discount] used by the CTA in computing for the
amount of the tax credit. In view of this, petitioner prayed for the refund of the amount of income
Merchandise Inventory, beg. P 4,875,944.00 tax it allegedly overpaid in the aggregate amount of P45,574.63 and P135,906.48, respectively, for
the taxable years 1993 and 1994 as a result of treating the sales discount of 20% as a tax
Add Purchases 28,138,103.00 deduction rather than as a tax credit.

Total Goods available for Sales
Less: Merchandise Inventory, End
The Commissioner, on the other hand, moved for a re-computation of petitioners tax liability
P 33,014,047.00 averring that the sales discount of 20% should be deducted from gross income to arrive at the
taxable income. Such discount cannot be considered a tax credit because the latter, being in the
5,036.117.00 27,977,930.00 nature of a tax refund, is treated as a return of tax payments erroneously or excessively assessed
and collected as provided under Section 204(3) of the Tax Code, to wit:

Gross Income P 2,441,804.00 (3) x x x No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in
writing with the Commissioner a claim for credit or refund within two (2) years after the payment of
Less: Operating Expenses 1,880,153.00
the tax or penalty.

Net Operating Income P 561,651.00 lawphil.net

Add: Miscellaneous Income 82,207.00 In its Resolution, dated December 7, 1998, the CTA modified its earlier decision, thus:

ACCORDINGLY, the petitioners Motion for Partial Reconsideration is hereby GRANTED.

Net Income P 643,858.00
Respondent is hereby ORDERED to ISSUE tax credit certificates in favor of petitioner [in] the
Less: Interest Income Subject to Final Tax 30,618.00 amounts of P45,574.63 and P135,906.48 representing overpaid income tax for the years 1993 and
1994, as prayed for in its motion. On the other hand, the Respondents Motion for Reconsideration
is DENIED for lack of merit.

Net Taxable Income P 613,240.00

SO ORDERED.5
Tax Due (613,240 x 35%) P 214,634.00

Less: 1) Tax Credit (Cost of 20% Discount) Consequently, the Commissioner filed a petition for review with the Court of Appeals asking for the
[(28,585,003.00/31,160,838.00) reversal of the CTA Decision and Resolution.
x 80,330.34] P316,156.48
The Court of Appeals rendered its assailed Decision on October 19, 1999, the dispositive portion
2) Income Tax Payment for the Year 34,384.00 P 350,540.48
of which reads:

AMOUNT REFUNDABLE P 135,906.48 WHEREFORE, in view of the foregoing premises, the petition is hereby GRANTED IN PART. The
resolution issued by the Court of Tax Appeals dated December [7], 1998 is SET ASIDE and the
Decision rendered by the latter is AFFIRMED IN TOTO.

No costs.
WHEREFORE, in view of all the foregoing, petitioners claim for refund is hereby partially
GRANTED. Respondent is hereby ORDERED to REFUND, or in the alternative, to ISSUE a tax
credit certificate in favor of the petitioner the amounts of P45,574.63 and P135,906.48, SO ORDERED.6
representing overpaid income tax for the years 1993 and 1994, respectively.

Hence, this petition positing that:

SO ORDERED.4
THE COURT OF APPEALS ERRED IN RULING THAT IN COMPUTING THE TAX CREDIT TO BE
ALLOWED PETITIONER FOR DISCOUNTS GRANTED TO SENIOR CITIZENS ON THEIR
PURCHASE OF MEDICINES, THE ACQUISITION COST RATHER THAN THE ACTUAL
DISCOUNT GRANTED TO SENIOR CITIZENS SHOULD BE THE BASIS.7

Otherwise stated, the matter to be determined is the amount of tax credit that may be claimed by a
taxable entity which grants a 20% sales discount to qualified senior citizens on their purchase of
medicines pursuant to Section 4(a) of R.A. No. 7432 which states:

Sec. 4. Privileges for the Senior citizens. The senior citizens shall be entitled to the following:

a) the grant of twenty percent (20%) discount from all establishments relative to utilization of
transportation services, hotels and similar lodging establishments, restaurants and recreation
centers and purchase of medicines anywhere in the country: Provided, That private establishments
may claim the cost8 as tax credit.

The term "cost" in the above provision refers to the amount of the 20% discount extended by a
private establishment to senior citizens in their purchase of medicines. This amount shall be
applied as a tax credit, and may be deducted from the tax liability of the entity concerned. If there
is no current tax due or the establishment reports a net loss for the period, the credit may be G.R. No. 159610 June 12, 2008
carried over to the succeeding taxable year. This is in line with the interpretation of this Court
in Commissioner of Internal Revenue v. Central Luzon Drug Corporation 9 wherein it affirmed that
R.A. No. 7432 allows private establishments to claim as tax credit the amount of discounts they COMMISSIONER OF INTERNAL REVENUE, petitioner,
grant to senior citizens. vs.
CENTRAL LUZON DRUG CORPORATION, respondent.

The Court notes that petitioner, while praying for the reinstatement of the CTA Resolution, dated
December 7, 1998, directing the issuance of tax certificates in favor of petitioner for the respective DECISION
amounts of P45,574.63 and P135,906.48 representing overpaid income tax for 1993 and 1994,
asks for the refund of the same.10 CARPIO, J.:

In this regard, petitioners claim for refund must be denied. The law expressly provides that the
discount given to senior citizens may be claimed as a tax credit, and not a refund. Thus, where the
words of a statute are clear, plain and free from ambiguity, it must be given its literal meaning and
applied without attempted interpretation.11
WHEREFORE, the petition is PARTLY GRANTED. The Decision and Resolution of the Court of
Appeals, dated October 19, 1999 and February 18, 2000, respectively, in CA-G.R SP No. 49946
are REVERSED and SET ASIDE. The Resolution of the Court of Tax Appeals, dated December 7,
1998, directing the issuance of tax credit certificates in favor of petitioner in the amounts
of P45,574.63 and P135,906.48 is hereby REINSTATED. No costs.
The Case
This petition for review on certiorari1 assails the 13 August 2003 Decision2 of the Court of Appeals
in CA-G.R. SP No. 70480. The Court of Appeals dismissed the appeal filed by the Commissioner
of Internal Revenue (petitioner) questioning the 15 April 2002 Decision 3 of the Court of Tax Appeals
(CTA) in CTA Case No. 6054 ordering petitioner to issue, in favor of Central Luzon Drug
Corporation (respondent), a tax credit certificate in the amount of P2,376,805.63, arising from the
alleged erroneous interpretation of the term "tax credit" used in Section 4(a) of Republic Act No.
(RA) 7432.4

The Facts
SO ORDERED.

Respondent is a domestic corporation engaged in the retail of medicines and other pharmaceutical
products.5 In 1997, it operated eight drugstores under the business name and style "Mercury
Drug."6

Pursuant to the provisions of RA 7432 and Revenue Regulations No. (RR) 2-94 7 issued by the
Bureau of Internal Revenue (BIR), respondent granted 20% sales discount to qualified senior
citizens on their purchases of medicines covering the calendar year 1997. The sales discount
granted to senior citizens totaled P2,798,508.00.
On 15 April 1998, respondent filed its 1997 Corporate Annual Income Tax Return reflecting a nil
income tax liability due to net loss incurred from business operations
of P2,405,140.00.8 Respondent filed its 1997 Income Tax Return under protest. 9 Add: 20% Sales Discount to Senior Citizens

On 19 March 1999, respondent filed with the petitioner a claim for refund or credit of overpaid
income tax for the taxable year 1997 in the amount of P2,660,829.00.10 Respondent alleged that
the overpaid tax was the result of the wrongful implementation of RA 7432. Respondent treated the Sales, Gross
20% sales discount as a deduction from gross sales in compliance with RR 2-94 instead of treating
it as a tax credit as provided under Section 4(a) of RA 7432.

On 6 April 2000, respondent filed a Petition for Review with the CTA in order to toll the running of Less: Cost of Sales
the two-year statutory period within which to file a judicial claim. Respondent reasoned that RR 2-
94, which is a mere implementing administrative regulation, cannot modify, alter or amend the
clear mandate of RA 7432. Consequently, Section 2(i) of RR 2-94 is without force and effect for
being inconsistent with the law it seeks to implement. 11
Merchandise inventory, beg. P 20,905,489.00

In his Answer, petitioner stated that the construction given to a statute by a specialized
administrative agency like the BIR is entitled to great respect and should be accorded great
weight. When RA 7432 allowed senior citizens' discounts to be claimed as tax credit, it was silent
as to the mechanics of availing the same. For clarification, the BIR issued RR 2-94 and defined the Purchases 168,762,950.00
term "tax credit" as a deduction from the establishment's gross income and not from its tax liability
in order to avoid an absurdity that is not intended by the law. 12

The Ruling of the Court of Tax Appeals Merchandise inventory, end -27,281,439.00

On 15 April 2002, the CTA rendered a Decision ordering petitioner to issue a tax credit certificate in
the amount of P2,376,805.63 in favor of respondent.
Gross Profit
The CTA stated that in a number of analogous cases, it has consistently ruled that the 20% senior
citizens' discount should be treated as tax credit instead of a mere deduction from gross
income.13 In quoting its previous decisions, the CTA ruled that RR 2-94 engraved a new meaning
to the phrase "tax credit" as deductible from gross income which is a deviation from the plain
Add: Miscellaneous income
intendment of the law. An administrative regulation must not contravene but should conform to the
standards that the law prescribes. 14

The CTA also ruled that respondent has properly substantiated its claim for tax credit by
Total Income
documentary evidence. However, based on the examination conducted by the commissioned
independent certified public accountant (CPA), there were some material discrepancies due to
missing cash slips, lack of senior citizen's ID number, failure to include the cash slips in the
summary report and vice versa. Therefore, between the Summary Report presented by
respondent and the audited amount presented by the independent CPA, the CTA deemed it proper Less: Operating expenses
to consider the lesser of two amounts.

The re-computation of the overpaid income tax 15 for the year 1997 is as follows:
Net Income

Sales, Net
Less: Income subjected to final tax (Interest Income 16)

Net Taxable Income
Income Tax Due (35%)
Less: Tax Credit (Cost of 20% discount as adjusted17)
Income Tax Payable
Income Tax Actually Paid
Income Tax Refundable
Aggrieved by the CTA's decision, petitioner elevated the case before the Court of Appeals.
The Ruling of the Appellate Court
On 13 August 2003, the Court of Appeals affirmed the CTA's decision in toto.
The Court of Appeals disagreed with petitioner's contention that the CTA's decision applied a literal
interpretation of the law. It reasoned that under the verba legis rule, if the statute is clear, plain, and
free from ambiguity, it must be given its literal meaning and applied without interpretation. This
principle rests on the presumption that the words used by the legislature in a statute correctly
express its intent and preclude the court from construing it differently. 18
The Court of Appeals distinguished "tax credit" as an amount subtracted from a taxpayer's total tax
liability to arrive at the tax due while a "tax deduction" reduces the taxpayer's taxable income upon
which the tax liability is computed. "A credit differs from deduction in that the former is subtracted
from tax while the latter is subtracted from income before the tax is computed." 19
The Court of Appeals found no legal basis to support petitioner's opinion that actual payment by
the taxpayer or actual receipt by the government of the tax sought to be credited or refunded is a
condition sine qua non for the availment of tax credit as enunciated in Section 229 20 of the Tax
Code. The Court of Appeals stressed that Section 229 of the Tax Code pertains to illegally
collected or erroneously paid taxes while RA 7432 is a special law which uses the method of tax
credit in the context of just compensation. Further, RA 7432 does not require prior tax payment as
a condition for claiming the cost of the sales discount as tax credit.
Hence, this petition.
The Issues
Petitioner raises two issues21 in this Petition:
1. Whether the appellate court erred in holding that respondent may claim the 20%
senior citizens' sales discount as a tax credit deductible from future income tax
liabilities instead of a mere deduction from gross income or gross sales; and
2. Whether the appellate court erred in holding that respondent is entitled to a refund.
The Ruling of the Court
The petition lacks merit.
The issues presented are not novel. In two similar cases involving the same parties where
respondent lodged its claim for tax credit on the senior citizens' discount granted in 1995 22 and
1996,23 this Court has squarely ruled that the 20% senior citizens' discount required by RA 7432
may be claimed as a tax credit and not merely a tax deduction from gross sales or gross income.
Under RA 7432, Congress granted the tax credit benefit to all covered establishments without
conditions. The net loss incurred in a taxable year does not preclude the grant of tax credit
because by its nature, the tax credit may still be deducted from a future, not a present, tax liability.
However, the senior citizens' discount granted as a tax credit cannot be refunded.
RA 7432 expressly allows private establishments
to claim the amount of discounts they grant to senior citizens
as tax credit.
Section 4(a) of RA 7432 states:
SECTION 4. Privileges for the Senior Citizens. - The senior citizens shall be entitled to
the following:
a) the grant of twenty percent (20%) discount from all establishments
relative to the utilization of transportation services, hotels and similar
lodging establishments, restaurants and recreation centers and purchase
of medicines anywhere in the country: Provided, That private
establishments may claim the cost as tax credit; (Emphasis supplied)
However, RR 2-94 interpreted the tax credit provision of RA 7432 in this wise:
Sec. 2. DEFINITIONS. - For purposes of these regulations:
xxx
i. Tax Credit - refers to the amount representing 20% discount granted to a
qualified senior citizen by all establishments relative to their utilization of
transportation services, hotels and similar lodging establishments, restaurants,
drugstores, recreation centers, theaters, cinema houses, concert halls, circuses,
carnivals and other similar places of culture, leisure and amusement, which discount
shall be deducted by the said establishments from their gross income for
income tax purposes and from their gross sales for value-added tax or other
percentage tax purposes. (Emphasis supplied).
xxx
Sec. 4. Recording/Bookkeeping Requirement for Private Establishments
xxx
The amount of 20% discount shall be deducted from the gross income for
income tax purposes and from gross sales of the business enterprise concerned for
purposes of the VAT and other percentage taxes. (Emphasis supplied)
Tax credit is defined as a peso-for-peso reduction from a taxpayer's tax liability. It is a direct
subtraction from the tax payable to the government. On the other hand, RR 2-94 treated the
amount of senior citizens' discount as a tax deduction which is only a subtraction from gross
income resulting to a lower taxable income. RR 2-94 treats the senior citizens' discount in the
same manner as the allowable deductions provided in Section 34, Chapter VII of the National
Internal Revenue Code. RR 2-94 affords merely a fractional reduction in the taxes payable to the
government depending on the applicable tax rate.
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,24 the Court ruled that
petitioner's definition in RR 2-94 of a tax credit is clearly erroneous. To deny the tax credit, despite
the plain mandate of the law, is indefensible. In Commissioner of Internal Revenue v. Central
Luzon Drug Corporation, the Court declared, "When the law says that the cost of the discount may
be claimed as a tax credit, it means that the amount- when claimed shall be treated as a
reduction from any tax liability, plain and simple." The Court further stated that the law cannot be
amended by a mere regulation because "administrative agencies in issuing these regulations may
not enlarge, alter or restrict the provisions of the law it administers; it cannot engraft additional
requirements not contemplated by the legislature." Hence, there being a dichotomy in the law and
the revenue regulation, the definition provided in Section 2(i) of RR 2-94 cannot be given effect.
The tax credit may still be deducted
from a future, not a present, tax liability.
In the petition filed before this Court, petitioner alleged that respondent incurred a net loss from its
business operations in 1997; hence, it did not pay any income tax. Since no tax payment was
made, it follows that no tax credit can also be claimed because tax credits are usually applied
against a tax liability.25
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,26 the Court stressed that
prior payment of tax liability is not a pre-condition before a taxable entity can avail of the tax credit.
The Court declared, "Where there is no tax liability or where a private establishment reports a net
loss for the period, the tax credit can be availed of and carried over to the next taxable year." 27 It is
irrefutable that under RA 7432, Congress has granted the tax credit benefit to all covered
establishments without conditions. Therefore, neither a tax liability nor a prior tax payment is
required for the existence or grant of a tax credit.28 The applicable law on this point is clear and
without any qualifications.29
Hence, respondent is entitled to claim the amount of P2,376,805.63 as tax credit despite incurring
net loss from business operations for the taxable year 1997.
The senior citizens' discount may be claimed
as a tax credit and not a refund.
Section 4(a) of RA 7432 expressly provides that private establishments may claim the cost as a tax
credit. A tax credit can only be utilized as payment for future internal revenue tax liabilities of the
taxpayer while a tax refund, issued as a check or a warrant, can be encashed. A tax refund can be
availed of immediately while a tax credit can only be utilized if the taxpayer has existing or future
tax liabilities.
If the words of the law are clear, plain, and free of ambiguity, it must be given its literal meaning
and applied without any interpretation. Hence, the senior citizens' discount may be claimed as a
tax credit and not as a refund.30
RA 9257 now specifically provides that all covered establishments
may claim the senior citizens' discount as tax deduction.
On 26 February 2004, RA 9257, otherwise known as the "Expanded Senior Citizens Act of 2003,"
was signed into law and became effective on 21 March 2004. 31
RA 9257 has amended RA 7432. Section 4(a) of RA 9257 reads:
"Sec. 4. Privileges for the Senior Citizens. - The senior citizens shall be entitled to the
following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the
utilization of services in hotels and similar lodging establishments, restaurants and
recreation centers, and purchase of medicinesin all establishments for the exclusive
use or enjoyment of senior citizens, including funeral and burial services for the death
of senior citizens;
xxx
The establishment may claim the discounts granted under (a), (f), (g) and (h)
as tax deduction based on the net cost of the goods sold or services
 rendered: Provided, That the cost of the discount shall be allowed as deduction from
gross income for the same taxable year that the discount is granted. Provided, further,
That the total amount of the claimed tax deduction net of value added tax if applicable,
shall be included in their gross sales receipts for tax purposes and shall be subject to
proper documentation and to the provisions of the National Internal Revenue Code, as
amended." (Emphasis supplied)
Contrary to the provision in RA 7432 where the senior citizens' discount granted by all covered
establishments can be claimed as tax credit, RA 9257 now specifically provides that this discount
should be treated as tax deduction.
With the effectivity of RA 9257 on 21 March 2004, there is now a new tax treatment for senior
citizens' discount granted by all covered establishments. This discount should be considered as a
deductible expense from gross income and no longer as tax credit. 32 The present case, however,
covers the taxable year 1997 and is thus governed by the old law, RA 7432.
WHEREFORE, we DENY the petition. We AFFIRM the assailed Decision of the Court of Appeals
dated 13 August 2003 in CA-G.R. SP No. 70480.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 172231 February 12, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
ISABELA CULTURAL CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision 1 of
the Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision 2 of the
Court of Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside the Assessment
Notices for deficiency income tax and expanded withholding tax issued by the Bureau of Internal
Revenue (BIR) against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR
Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded
withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the
taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIRs disallowance of ICCs claimed expense deductions for professional and
security services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co., 3 for the year ending
December 31, 1985;4
(b) Expenses for the legal services [inclusive of retainer fees] of the law
firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the
years 1984 and 1985.5
(c) Expense for security services of El Tigre Security & Investigation
Agency for the months of April and May 1986.6
(2) The alleged understatement of ICCs interest income on the three promissory notes
due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was
allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed
P244,890.00 deduction for security services.7
On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9,
1995, however, it received a final notice before seizure demanding payment of the amounts stated
in the said notices. Hence, it brought the case to the CTA which held that the petition is premature
because the final notice of assessment cannot be considered as a final decision appealable to the
tax court. This was reversed by the Court of Appeals holding that a demand letter of the BIR
reiterating the payment of deficiency tax, amounts to a final decision on the protested assessment
and may therefore be questioned before the CTA. This conclusion was sustained by this Court on
July 1, 2001, in G.R. No. 135210. 8 The case was thus remanded to the CTA for further
proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment
notices issued against ICC. It held that the claimed deductions for professional and security
services were properly claimed by ICC in 1986 because it was only in the said year when the bills
demanding payment were sent to ICC. Hence, even if some of these professional services were
rendered to ICC in 1984 or 1985, it could not declare the same as deduction for the said years as
the amount thereof could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the subject promissory notes.
It found that it was the BIR which made an overstatement of said income when it compounded the
interest income receivable by ICC from the promissory notes of Realty Investment, Inc., despite
the absence of a stipulation in the contract providing for a compounded interest; nor of a
circumstance, like delay in payment or breach of contract, that would justify the application of
compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed
deduction for security services as shown by the various payment orders and confirmation receipts
it presented as evidence. The dispositive portion of the CTAs Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for
deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-
000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of
surcharges and interest, both for the taxable year 1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,10 holding that although the professional services (legal and auditing services) were
rendered to ICC in 1984 and 1985, the cost of the services was not yet determinable at that time,
hence, it could be considered as deductible expenses only in 1986 when ICC received the billing
statements for said services. It further ruled that ICC did not understate its interest income from the
promissory notes of Realty Investment, Inc., and that ICC properly withheld and remitted taxes on
the payments for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending
that since ICC is using the accrual method of accounting, the expenses for the professional
services that accrued in 1984 and 1985, should have been declared as deductions from income
during the said years and the failure of ICC to do so bars it from claiming said expenses as
deduction for the taxable year 1986. As to the alleged deficiency interest income and failure to
withhold expanded withholding tax assessment, petitioner invoked the presumption that the
assessment notices issued by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of
the expenses for professional and security services from ICCs gross income; and (2) held that ICC
did not understate its interest income from the promissory notes of Realty Investment, Inc; and that
ICC withheld the required 1% withholding tax from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are: (a) the expense must be
ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must
have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be
supported by receipts, records or other pertinent papers. 11
The requisite that it must have been paid or incurred during the taxable year is further qualified by
Section 45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction
provided for in this Title shall be taken for the taxable year in which paid or accrued or paid or
incurred, dependent upon the method of accounting upon the basis of which the net income is
computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and how to
report income and deductions.12 In the instant case, the accounting method used by ICC is the
accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when they
are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a
taxpayer who is authorized to deduct certain expenses and other allowable deductions for the
current year but failed to do so cannot deduct the same for the next year. 13
The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay
them, in opposition to actual receipt or payment, which characterizes the cash method of
accounting. Amounts of income accrue where the right to receive them become fixed, where there
is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in
amount, without regard to indeterminacy merely of time of payment. 14
For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of
income and expense is permitted when the all-events test has been met. This test requires: (1)
fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate
determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such income
or liability be determined with reasonable accuracy. However, the test does not demand that the
amount of income or liability be known absolutely, only that a taxpayer has at his disposal the
information necessary to compute the amount with reasonable accuracy. The all-events test is
satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied
where a computation may be unknown, but is not as much as unknowable, within the taxable
year. The amount of liability does not have to be determined exactly; it must be determined
with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies
something less than an exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable year.
[16] Accrual method of accounting presents largely a question of fact; such that the taxpayer bears
the burden of proof of establishing the accrual of an item of income or deduction. 17
Corollarily, it is a governing principle in taxation that tax exemptions must be construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and one who
claims an exemption must be able to justify the same by the clearest grant of organic or statute
law. An exemption from the common burden cannot be permitted to exist upon vague implications.
And since a deduction for income tax purposes partakes of the nature of a tax exemption, then it
must also be strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for legal and auditing
services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of
the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement
of the expenses of said firm in connection with ICCs tax problems for the year 1984. As testified by
the Treasurer of ICC, the firm has been its counsel since the 1960s. 19 From the nature of the
claimed deductions and the span of time during which the firm was retained, ICC can be expected
to have reasonably known the retainer fees charged by the firm as well as the compensation for its
legal services. The failure to determine the exact amount of the expense during the taxable year
when they could have been claimed as deductions cannot thus be attributed solely to the delayed
billing of these liabilities by the firm. For one, ICC, in the exercise of due diligence could have
inquired into the amount of their obligation to the firm, especially so that it is using the accrual
method of accounting. For another, it could have reasonably determined the amount of legal and
retainer fees owing to its familiarity with the rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that the taxpayer
bears the burden of establishing the accrual of an expense or income. However, ICC failed to
discharge this burden. As to when the firms performance of its services in connection with the
1984 tax problems were completed, or whether ICC exercised reasonable diligence to inquire
about the amount of its liability, or whether it does or does not possess the information necessary
to compute the amount of said liability with reasonable accuracy, are questions of fact which ICC
never established. It simply relied on the defense of delayed billing by the firm and the company,
which under the circumstances, is not sufficient to exempt it from being charged with knowledge of
the reasonable amount of the expenses for legal and auditing services.

In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC
for the year 1985 cannot be validly claimed as expense deductions in 1986. This is so because
ICC failed to present evidence showing that even with only "reasonable accuracy," as the standard
to ascertain its liability to SGV & Co. in the year 1985, it cannot determine the professional fees
which said company would charge for its services.

ICC thus failed to discharge the burden of proving that the claimed expense deductions for the
professional services were allowable deductions for the taxable year 1986. Hence, per Revenue
Audit Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income for
the said year and were therefore properly disallowed by the BIR.

As to the expenses for security services, the records show that these expenses were incurred by
ICC in 198620 and could therefore be properly claimed as deductions for the said year.

Anent the purported understatement of interest income from the promissory notes of Realty
Investment, Inc., we sustain the findings of the CTA and the Court of Appeals that no such
understatement exists and that only simple interest computation and not a compounded one
should have been applied by the BIR. There is indeed no stipulation between the latter and ICC on
the application of compounded interest. 21 Under Article 1959 of the Civil Code, unless there is a
stipulation to the contrary, interest due should not further earn interest.

Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions for security services and remitted the same to the BIR
is supported by payment order and confirmation receipts. 22 Hence, the Assessment Notice for
deficiency expanded withholding tax was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency
income tax should be cancelled and set aside but only insofar as the claimed deductions of ICC for
security services. Said Assessment is valid as to the BIRs disallowance of ICCs expenses for
professional services. The Court of Appeals cancellation of Assessment Notice No. FAS-1-86-90-
000681 in the amount of P4,897.79 for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the
Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that
Assessment Notice No. FAS-1-86-90-000680, which disallowed the expense deduction of Isabela
Cultural Corporation for professional and security services, is declared valid only insofar as the
expenses for the professional fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso
Cudala Pecson Azcuna & Bengson, are concerned. The decision is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporations liability
under Assessment Notice No. FAS-1-86-90-000680.
SO ORDERED.
G.R. No. 143672 April 24, 2003
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
GENERAL FOODS (PHILS.), INC., respondent.
CORONA, J.:
Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution 1 of the Court
of Appeals reversing the decision2 of the Court of Tax Appeals which in turn denied the protest filed
by respondent General Foods (Phils.), Inc., regarding the assessment made against the latter for
deficiency taxes.
The records reveal that, on June 14, 1985, respondent corporation, which is engaged in the
manufacture of beverages such as "Tang," "Calumet" and "Kool-Aid," filed its income tax return for
the fiscal year ending February 28, 1985. In said tax return, respondent corporation claimed as
deduction, among other business expenses, the amount of P9,461,246 for media advertising for
"Tang."
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed by
respondent corporation. Consequently, respondent corporation was assessed deficiency income
taxes in the amount of P2,635, 141.42. The latter filed a motion for reconsideration but the same
was denied.

On September 29, 1989, respondent corporation appealed to the Court of Tax Appeals but the
appeal was dismissed:
 With such a gargantuan expense for the advertisement of a singular product, which
even excludes "other advertising and promotions" expenses, we are not prepared to
accept that such amount is reasonable "to stimulate the current sale of merchandise"
regardless of Petitioners explanation that such expense "does not connote
unreasonableness considering the grave economic situation taking place after the
Aquino assassination characterized by capital fight, strong deterioration of the
purchasing power of the Philippine peso and the slacking demand for consumer
products" (Petitioners Memorandum, CTA Records, p. 273). We are not convinced with
such an explanation. The staggering expense led us to believe that such expenditure
was incurred "to create or maintain some form of good will for the taxpayers trade or
business or for the industry or profession of which the taxpayer is a member." The term
"good will" can hardly be said to have any precise signification; it is generally used to
denote the benefit arising from connection and reputation (Words and Phrases, Vol. 18,
p. 556 citing Douhart vs. Loagan, 86 III. App. 294). As held in the case of Welch vs.
Helvering, efforts to establish reputation are akin to acquisition of capital assets and,
therefore, expenses related thereto are not business expenses but capital
expenditures. (Atlas Mining and Development Corp. vs. Commissioner of Internal
Revenue, supra). For sure such expenditure was meant not only to generate present
sales but more for future and prospective benefits. Hence, "abnormally large
expenditures for advertising are usually to be spread over the period of years during
which the benefits of the expenditures are received" (Mertens, supra, citing Colonial
Ice Cream Co., 7 BTA 154).
WHEREFORE, in all the foregoing, and finding no error in the case appealed from, we
hereby RESOLVE to DISMISS the instant petition for lack of merit and ORDER the
Petitioner to pay the respondent Commissioner the assessed amount of P2,635,141.42
representing its deficiency income tax liability for the fiscal year ended February 28,
1985."3
Aggrieved, respondent corporation filed a petition for review at the Court of Appeals which
rendered a decision reversing and setting aside the decision of the Court of Tax Appeals:
Since it has not been sufficiently established that the item it claimed as a deduction is
excessive, the same should be allowed.
WHEREFORE, the petition of petitioner General Foods (Philippines), Inc. is hereby
GRANTED. Accordingly, the Decision, dated 8 February 1994 of respondent Court of
Tax Appeals is REVERSED and SET ASIDE and the letter, dated 31 May 1988 of
respondent Commissioner of Internal Revenue is CANCELLED.
SO ORDERED.4
Thus, the instant petition, wherein the Commissioner presents for the Courts consideration a lone
issue: whether or not the subject media advertising expense for "Tang" incurred by respondent
corporation was an ordinary and necessary expense fully deductible under the National Internal
Revenue Code (NIRC).
It is a governing principle in taxation that tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority; 5 and he who claims an
exemption must be able to justify his claim by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist upon vague implications. 6
Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax
exemptions are strictly construed, then deductions must also be strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was the media advertising
expense for "Tang" paid or incurred by respondent corporation for the fiscal year ending February
28, 1985 "necessary and ordinary," hence, fully deductible under the NIRC? Or was it a capital
expenditure, paid in order to create "goodwill and reputation" for respondent corporation and/or its
products, which should have been amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or professional expenses.-
(a) In general.- There shall be allowed as deduction from gross income all
ordinary and necessary expenses paid or incurred during the taxable year
in carrying on, or which are directly attributable to, the development,
management, operation and/or conduct of the trade, business or exercise
of a profession.
Simply put, to be deductible from gross income, the subject advertising expense must comply with
the following requisites: (a) the expense must be ordinary and necessary; (b) it must have been
paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the
trade or business of the taxpayer; and (d) it must be supported by receipts, records or other
pertinent papers.7
The parties are in agreement that the subject advertising expense was paid or incurred within the
corresponding taxable year and was incurred in carrying on a trade or business. Hence, it was
necessary. However, their views conflict as to whether or not it was ordinary. To be deductible, an
advertising expense should not only be necessary but also ordinary. These two requirements must
be met.
The Commissioner maintains that the subject advertising expense was not ordinary on the ground
that it failed the two conditions set by U.S. jurisprudence: first, "reasonableness" of the amount
incurred and second, the amount incurred must not be a capital outlay to create "goodwill" for the
product and/or private respondents business. Otherwise, the expense must be considered a
capital expenditure to be spread out over a reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an
advertising expense. There being no hard and fast rule on the matter, the right to a deduction
depends on a number of factors such as but not limited to: the type and size of business in which
the taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure
itself; the intention of the taxpayer and the general economic conditions. It is the interplay of these,
among other factors and properly weighed, that will yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising expense for "Tang" alone was
almost one-half of its total claim for "marketing expenses." Aside from that, respondent-corporation
also claimed P2,678,328 as "other advertising and promotions expense" and another P1,548,614,
for consumer promotion.
Furthermore, the subject P9,461,246 media advertising expense for "Tang" was almost double the
amount of respondent corporations P4,640,636 general and administrative expenses.
We find the subject expense for the advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under
then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or
use of services and (2) advertising designed to stimulate the future sale of merchandise or use of
services. The second type involves expenditures incurred, in whole or in part, to create or maintain
some form of goodwill for the taxpayers trade or business or for the industry or profession of which
the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except
as to the question of the reasonableness of amount, there is no doubt such expenditures are
deductible as business expenses. If, however, the expenditures are for advertising of the second
kind, then normally they should be spread out over a reasonable period of time.
We agree with the Court of Tax Appeals that the subject advertising expense was of the second
kind. Not only was the amount staggering; the respondent corporation itself also admitted, in its
letter protest8 to the Commissioner of Internal Revenues assessment, that the subject media
expense was incurred in order to protect respondent corporations brand franchise, a critical point
during the period under review.
The protection of brand franchise is analogous to the maintenance of goodwill or title to ones
property. This is a capital expenditure which should be spread out over a reasonable period of
time.9
Respondent corporations venture to protect its brand franchise was tantamount to efforts to
establish a reputation. This was akin to the acquisition of capital assets and therefore expenses
related thereto were not to be considered as business expenses but as capital expenditures. 10
True, it is the taxpayers prerogative to determine the amount of advertising expenses it will incur
and where to apply them.11 Said prerogative, however, is subject to certain considerations. The first
relates to the extent to which the expenditures are actually capital outlays; this necessitates an
inquiry into the nature or purpose of such expenditures. 12 The second, which must be applied in
harmony with the first, relates to whether the expenditures are ordinary and necessary.
Concomitantly, for an expense to be considered ordinary, it must be reasonable in amount. The
Court of Tax Appeals ruled that respondent corporation failed to meet the two foregoing limitations.
We find said ruling to be well founded. Respondent corporation incurred the subject advertising
expense in order to protect its brand franchise. We consider this as a capital outlay since it created
goodwill for its business and/or product. The P9,461,246 media advertising expense for the
promotion of a single product, almost one-half of petitioner corporations entire claim for marketing
expenses for that year under review, inclusive of other advertising and promotion expenses of
P2,678,328 and P1,548,614 for consumer promotion, is doubtlessly unreasonable.
It has been a long standing policy and practice of the Court to respect the conclusions of quasi-
judicial agencies such as the Court of Tax Appeals, a highly specialized body specifically created
for the purpose of reviewing tax cases. The CTA, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax problems. It has necessarily developed an
expertise on the subject. We extend due consideration to its opinion unless there is an abuse or
improvident exercise of authority.13 Since there is none in the case at bar, the Court adheres to the
findings of the CTA.
Accordingly, we find that the Court of Appeals committed reversible error when it declared the
subject media advertising expense to be deductible as an ordinary and necessary expense on the
ground that "it has not been established that the item being claimed as deduction is excessive." It
is not incumbent upon the taxing authority to prove that the amount of items being claimed is
unreasonable. The burden of proof to establish the validity of claimed deductions is on the
taxpayer.14 In the present case, that burden was not discharged satisfactorily.
WHEREFORE, premises considered, the instant petition is GRANTED. The assailed decision of
the Court of Appeals is hereby REVERSED and SET ASIDE. Pursuant to Sections 248 and 249 of
the Tax Code, respondent General Foods (Phils.), Inc. is hereby ordered to pay its deficiency
income tax in the amount of P2,635,141.42, plus 25% surcharge for late payment and 20% annual
interest computed from August 25, 1989, the date of the denial of its protest, until the same is fully
paid.
SO ORDERED.
G.R. No. L-24059 November 28, 1969
C. M. HOSKINS & CO., INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Ross, Salcedo, Del Rosario, Bito and Misa for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete
and Special Attorney Michaelina R. Balasbas for respondent.
TEEHANKEE, J.:
We uphold in this taxpayer's appeal the Tax Court's ruling that payment by the taxpayer to its
controlling stockholder of 50% of its supervision fees or the amount of P99,977.91 is not a
deductible ordinary and necessary expense and should be treated as a distribution of earnings and
profits of the taxpayer.
Petitioner, a domestic corporation engaged in the real estate business as brokers, managing
agents and administrators, filed its income tax return for its fiscal year ending September 30, 1957
showing a net income of P92,540.25 and a tax liability due thereon of P18,508.00, which it paid in
due course. Upon verification of its return, respondent Commissioner of Internal Revenue,
disallowed four items of deduction in petitioner's tax returns and assessed against it an income tax
deficiency in the amount of P28,054.00 plus interests. The Court of Tax Appeals upon reviewing
the assessment at the taxpayer's petition, upheld respondent's disallowance of the principal item of
petitioner's having paid to Mr. C. M. Hoskins, its founder and controlling stockholder the amount of
P99,977.91 representing 50% of supervision fees earned by it and set aside respondent's
disallowance of three other minor items. The Tax Court therefore determined petitioner's tax
deficiency to be in the amount of P27,145.00 and on November 8, 1964 rendered judgment
against it, as follows:
WHEREFORE, premises considered, the decision of the respondent is hereby
modified. Petitioner is ordered to pay to the latter or his representative the sum of
P27,145.00, representing deficiency income tax for the year 1957, plus interest at 1/2%
per month from June 20, 1959 to be computed in accordance with the provisions of
Section 51(d) of the National Internal Revenue Code. If the deficiency tax is not paid
within thirty (30) days from the date this decision becomes final, petitioner is also
ordered to pay surcharge and interest as provided for in Section 51 (e) of the Tax
Code, without costs.
Petitioner questions in this appeal the Tax Court's findings that the disallowed payment to Hoskins
was an inordinately large one, which bore a close relationship to the recipient's dominant
stockholdings and therefore amounted in law to a distribution of its earnings and profits.
We find no merit in petitioner's appeal.
As found by the Tax Court, "petitioner was founded by Mr. C. M. Hoskins in 1937, with a capital
stock of 1,000 shares at a par value of P1.00 each share; that of these 1,000 shares, Mr. C. M.
Hoskins owns 996 shares (the other 4 shares being held by the other four officers of the
corporation), which constitute exactly 99.6% of the total authorized capital stock (p. 92, t.s.n.); that
during the first four years of its existence, Mr. C. M. Hoskins was the President, but during the
taxable period in question, that is, from October 1, 1956 to September 30, 1957, he was the
chairman of the Board of Directors and salesman-broker for the company (p. 93, t.s.n.); that as
chairman of the Board of Directors, he received a salary of P3,750.00 a month, plus a salary
bonus of about P40,000.00 a year (p. 94, t.s.n.); that he was also a stockholder and officer of the
Paradise Farms, Inc. and Realty Investments, Inc., from which petitioner derived a large portion of
its income in the form of supervision fees and commissions earned on sales of lots (pp. 97-99,
t.s.n.; Financial Statements, attached to Exhibit '1', p. 11, BIR rec.); that as chairman of the Board
of Directors of petitioner, his duties were: "To act as a salesman; as a director, preside over
meetings and to get all of the real estate business I could for the company by negotiating sales,
purchases, making appraisals, raising funds to finance real estate operations where that was
necessary' (p. 96, t.s.n.); that he was familiar with the contract entered into by the petitioner with
the Paradise Farms, Inc. and the Realty Investments, Inc. by the terms of which petitioner was 'to
program the development, arrange financing, plan the proposed subdivision as outlined in the
prospectus of Paradise Farms, Inc., arrange contract for road constructions, with the provision of
water supply to all of the lots and in general to serve as managing agents for the Paradise Farms,
Inc. and subsequently for the Realty Investment, Inc." (pp. 96-97. t.s.n.)
Considering that in addition to being Chairman of the board of directors of petitioner corporation,
which bears his name, Hoskins, who owned 99.6% of its total authorized capital stock while the
four other officers-stockholders of the firm owned a total of four-tenths of 1%, or one-tenth of 1%
each, with their respective nominal shareholdings of one share each was also salesman-broker for
his company, receiving a 50% share of the sales commissions earned by petitioner, besides his
monthly salary of P3,750.00 amounting to an annual compensation of P45,000.00 and an annual
salary bonus of P40,000.00, plus free use of the company car and receipt of other similar
allowances and benefits, the Tax Court correctly ruled that the payment by petitioner to Hoskins of
the additional sum of P99,977.91 as his equal or 50% share of the 8% supervision fees received
by petitioner as managing agents of the real estate, subdivision projects of Paradise Farms, Inc.
and Realty Investments, Inc. was inordinately large and could not be accorded the treatment of
ordinary and necessary expenses allowed as deductible items within the purview of Section 30 (a)
(i) of the Tax Code.
If such payment of P99,977.91 were to be allowed as a deductible item, then Hoskins would
receive on these three items alone (salary, bonus and supervision fee) a total of P184,977.91,
which would be double the petitioner's reported net income for the year of P92,540.25. As correctly
observed by respondent. If independently, a one-time P100,000.00-fee to plan and lay down the
rules for supervision of a subdivision project were to be paid to an experienced realtor such as
Hoskins, its fairness and deductibility by the taxpayer could be conceded; but here 50% of the
supervision fee of petitioner was being paid by it to Hoskins every year since 1955 up to 1963 and
for as long as its contract with the subdivision owner subsisted, regardless of whether services
were actually rendered by Hoskins, since his services to petitioner included such planning and
supervision and were already handsomely paid for by petitioner.
The fact that such payment was authorized by a standing resolution of petitioner's board of
directors, since "Hoskins had personally conceived and planned the project" cannot change the
picture. There could be no question that as Chairman of the board and practically an absolutely
controlling stockholder of petitioner, holding 99.6% of its stock, Hoskins wielded tremendous power
and influence in the formulation and making of the company's policies and decisions. Even just as
board chairman, going by petitioner's own enumeration of the powers of the office, Hoskins, could
exercise great power and influence within the corporation, such as directing the policy of the
corporation, delegating powers to the president and advising the corporation in determining
executive salaries, bonus plans and pensions, dividend policies, etc. 1
Petitioner's invoking of its policy since its incorporation of sharing equally sales commissions with
its salesmen, in accordance with its board resolution of June 18, 1946, is equally untenable.
Petitioner's Sales Regulations provide:
Compensation of Salesmen
8. Schedule I In the case of sales to prospects discovered and worked by a
salesman, even though the closing is done by or with the help of the Sales Manager or
other members of the staff, the salesmen get one-half (1/2) of the total commission
received by the Company, but not exceeding five percent (5%). In the case of
subdivisions, when the office commission covers general supervision, the 1/2-rule
does not apply, the salesman's share being stipulated in the case of each subdivision.
In most cases the salesman's share is 4%.(Exh. "N-1").2
It will be readily seen therefrom that when the petitioner's commission covers general supervision,
it is provided that the 1/2 rule of equal sharing of the sales commissions does not apply and that
the salesman's share is stipulated in the case of each subdivision. Furthermore, what is involved
here is not Hoskins' salesman's share in the petitioner's 12% sales commission, which he
presumably collected also from petitioner without respondent's questioning it, but a 50% share
besides in petitioner's planning and supervision fee of 8% of the gross sales, as mentioned above.
This is evident from petitioner's board's resolution of July 14, 1953 (Exhibit 7), wherein it is recited
that in addition to petitioner's sales commission of 12% of gross sales, the subdivision owners
were paying to petitioner 8% of gross sales as supervision fee, and a collection fee of 5% of gross
collections, or total fees of 25% of gross sales.
The case before us is similar to previous cases of disallowances as deductible items of officers'
extra fees, bonuses and commissions, upheld by this Court as not being within the purview of
ordinary and necessary expenses and not passing the test of reasonable
compensation.3 In Kuenzle & Streiff, Inc. vs. Commissioner of Internal Revenuedecided by this
Court on May 29, 1969,4 we reaffirmed the test of reasonableness, enunciated in the earlier 1967
case involving the same parties, that: "It is a general rule that 'Bonuses to employees made in
good faith and as additional compensation for the services actually rendered by the employees are
deductible, provided such payments, when added to the stipulated salaries, do not exceed a
reasonable compensation for the services rendered' (4 Mertens Law of Federal Income Taxation,
Sec. 25.50, p. 410). The conditions precedent to the deduction of bonuses to employees are: (1)
the payment of the bonuses is in fact compensation; (2) it must be for personal services actually
rendered; and (3) the bonuses, when added to the salaries, are 'reasonable . . . when measured
by the amount and quality of the services performed with relation to the business of the particular
taxpayer' (Idem., Sec. 25, 44, p. 395).

"There is no fixed test for determining the reasonableness of a given bonus as compensation. This
depends upon many factors, one of them being 'the amount and quality of the services performed
with relation to the business.' Other tests suggested are: payment must be 'made in good faith';
'the character of the taxpayer's business, the volume and amount of its net earnings, its locality,
the type and extent of the services rendered, the salary policy of the corporation'; 'the size of the
particular business'; 'the employees' qualifications and contributions to the business venture'; and
'general economic conditions' (4 Mertens, Law of Federal Income Taxation, Secs. 25.44, 25.49,
25.50, 25.51, pp. 407-412). However, 'in determining whether the particular salary or
compensation payment is reasonable, the situation must be considered as whole. Ordinarily, no
single factor is decisive. . . . it is important to keep in mind that it seldom happens that the
application of one test can give satisfactory answer, and that ordinarily it is the interplay of several
factors, properly weighted for the particular case, which must furnish the final answer."

Petitioner's case fails to pass the test. On the right of the employer as against respondent
Commissioner to fix the compensation of its officers and employees, we there held further that
while the employer's right may be conceded, the question of the allowance or disallowance thereof
as deductible expenses for income tax purposes is subject to determination by respondent
Commissioner of Internal Revenue. Thus: "As far as petitioner's contention that as employer it has
the right to fix the compensation of its officers and employees and that it was in the exercise of G.R. No. L-13325 April 20, 1961
such right that it deemed proper to pay the bonuses in question, all that We need say is this: that
right may be conceded, but for income tax purposes the employer cannot legally claim such
bonuses as deductible expenses unless they are shown to be reasonable. To hold otherwise would SANTIAGO GANCAYCO, petitioner,
open the gate of rampant tax evasion. vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent.

"Lastly, We must not lose sight of the fact that the question of allowing or disallowing as deductible
expenses the amounts paid to corporate officers by way of bonus is determined by respondent
exclusively for income tax purposes. Concededly, he has no authority to fix the amounts to be paid
to corporate officers by way of basic salary, bonus or additional remuneration a matter that lies
more or less exclusively within the sound discretion of the corporation itself. But this right of the
corporation is, of course, not absolute. It cannot exercise it for the purpose of evading payment of
taxes legitimately due to the State."
Finally, it should be noted that we have here a case practically of a sole proprietorship of C. M.
Hoskins, who however chose to incorporate his business with himself holding virtually absolute
control thereof with 99.6% of its stock with four other nominal shareholders holding one share
each. Having chosen to use the corporate form with its legal advantages of a separate corporate
personality as distinguished from his individual personality, the corporation so created, i.e.,
petitioner, is bound to comport itself in accordance with corporate norms and comply with its
corporate obligations. Specifically, it is bound to pay the income tax imposed by law on
corporations and may not legally be permitted, by way of corporate resolutions authorizing
payment of inordinately large commissions and fees to its controlling stockholder, to dilute and
diminish its corresponding corporate tax liability.
ACCORDINGLY, the decision appealed from is hereby affirmed, with costs in both instances
against petitioner.
Benjamin J. Molina for petitioner.
Office of the Solicitor General and Special Attorney Antonio A. Garces for respondent.
CONCEPCION, J.:
Petitioner Santiago Gancayco seeks the review of a decision of the Court of Tax Appeals, requiring
him to pay P16,860.31, plus surcharge and interest, by way of deficiency income tax for the year
1949.
On May 10, 1950, Gancayco filed his income tax return for the year 1949. Two (2) days later,
respondent Collector of Internal Revenue issued the corresponding notice advising him that his
income tax liability for that year amounted P9,793.62, which he paid on May 15, 1950. A year later,
on May 14, 1951, respondent wrote the communication Exhibit C, notifying Gancayco, inter alia,
that, upon investigation, there was still due from him, a efficiency income tax for the year 1949, the
sum of P29,554.05. Gancayco sought a reconsideration, which was part granted by respondent,
who in a letter dated April 8, 1953 (Exhibit D), informed petitioner that his income tax defendant
efficiency for 1949 amounted to P16,860.31. Gancayco urged another reconsideration (Exhibit O),
but no action taken on this request, although he had sent several communications calling
respondent's attention thereto.
On April 15, 1956, respondent issued a warrant of distraint and levy against the properties of
Gancayco for the satisfaction of his deficiency income tax liability, and accordingly, the municipal
treasurer of Catanauan, Quezon issued on May 29, 1956, a notice of sale of said property at public
auction on June 19, 1956. Upon petition of Gancayco filed on June 16, 1956, the Court of Tax
Appeal issued a resolution ordering the cancellation of the sale and directing that the same be
readvertised at a future date, in accordance with the procedure established by the National Internal
Revenue Code. Subsequently, or on June 22, 1956, Gancayco filed an amended petition praying
that said Court:
(a) Issue a writ of preliminary injunction, enjoining the respondents from enforcing the
collection of the alleged tax liability due from the petitioner through summary
proceeding pending determination of the present case;
(b) After a review of the present case adjudge that the right of the government to
enforce collection of any liability due on this account had already prescribed;
(c) That even assuming that prescription had not set in the objections of petitioner to
the disallowance of the entertainment, representation and farming expenses be
allowed;
xxx xxx xxx
In his answer respondent admitted some allegations the amended petition, denied other
allegations thereof an set up some special defenses. Thereafter Gancayco received from the
municipal treasurer of Catanauan, Quezon, another notice of auction sale of his properties, to take
place on August 29, 1956. On motion of Gancayco, the Court of Tax Appeals, by resolution dated
August 27, 1956, "cancelled" the aforementioned sale and enjoined respondent and the municipal
treasurer of Catanauan, Quezon, from proceeding with the same. After appropriate proceedings,
the Court of Tax Appeals rendered, on November 14, 1957, the decision adverted to above.
Gancayco maintains that the right to collect the deficiency income tax in question is barred by the
statute of limitations. In this connection, it should be noted, however, that there are two (2) civil
remedies for the collection of internal revenue taxes, namely: (a) by distraint of personal property
and levy upon real property; and (b) by "judicial action" (Commonwealth Act 456, section 316). The
first may not be availed of except within three (3) years after the "return is due or has been
made ..." (Tax Code, section 51 [d] ). After the expiration of said Period, income taxes may not be
legally and validly collected by distraint and/or levy (Collector of Internal Revenue v. Avelino, L-
9202, November 19, 1956; Collector of Internal Revenue v. Reyes, L-8685, January 31, 1957;
Collector of Internal Revenue v. Zulueta, L-8840, February 8, 1957; Sambrano v. Court of Tax
Appeals, L-8652, March 30, 1957). Gancayco's income tax return for 1949 was filed on May 10,
1950; so that the warrant of distraint and levy issued on May 15, 1956, long after the expiration of
said three-year period, was illegal and void, and so was the attempt to sell his properties in
pursuance of said warrant.
The "judicial action" mentioned in the Tax Code may be resorted to within five (5) years from the
date the return has been filed, if there has been no assessment, or within five (5) years from the
date of the assessment made within the statutory period, or within the period agreed upon, in
writing, by the Collector of Internal Revenue and the taxpayer. before the expiration of said five-
year period, or within such extension of said stipulated period as may have been agreed upon, in
writing, made before the expiration of the period previously situated, except that in the case of a
false or fraudulent return with intent to evade tax or of a failure to file a return, the judicial action
may be begun at any time within ten (10) years after the discovery of the falsity, fraud or omission
(Sections 331 and 332 of the Tax Code). In the case at bar, respondent made three (3)
assessments: (a) the original assessment of P9,793.62, made on May 12, 1950; (b) the first
deficiency income tax assessment of May 14, 1951, for P29,554.05; and (c) the amended
deficiency income tax assessment of April 8, 1953, for P16,860.31.
Gancayco argues that the five-year period for the judicial action should be counted from May 12,
1950, the date of the original assessment, because the income tax for 1949, he says, could have
been collected from him since then. Said assessment was, however, not for the deficiency income
tax involved in this proceedings, but for P9,793.62, which he paid forthwith. Hence, there never
had been any cause for a judicial action against him, and, per force, no statute of limitations to
speak of, in connection with said sum of P9,793.62.
Neither could said statute have begun to run from May 14, 1951, the date of the first deficiency
income tax assessment or P29,554.05, because the same was, upon Gancayco's request,
reconsidered or modified by the assessment made on April 8, 1953, for P16,860.31. Indeed, this
last assessment is what Gancayco contested in the amended petition filed by him with the Court of
Tax Appeals. The amount involved in such assessment which Gancayco refused to pay and
respondent tried to collect by warrant of distraint and/or levy, is the one in issue between the
parties. Hence, the five-year period aforementioned should be counted from April 8, 1953, so that
the statute of limitations does not bar the present proceedings, instituted on April 12, 1956, if the
same is a judicial action, as contemplated in section 316 of the Tax Code, which petitioner denies,
upon the ground that
a. "The Court of Tax Appeals does not have original jurisdiction to entertain an action
for the collection of the tax due;
b. "The proper party to commence the judicial action to collect the tax due is the
government, and
c. "The remedies provided by law for the collection of the tax are exclusive."
Said Section 316 provides:
The civil remedies for the collection of internal revenue taxes, fees, or charges, and
any increment thereto resulting from delinquency shall be (a) by distraint of goods,
chattels, or effects, and other personal property of whatever character, including stocks
and other securities, debts, credits, bank accounts, and interest in and rights to
personal property, and by levy upon real property; and (b) by judicial action. Either of
these remedies or both simultaneously may be pursued in the discretion of the
authorities charged with the collection of such taxes.
No exemption shall be allowed against the internal revenue taxes in any case.
Petitioner contends that the judicial action referred to in this provision is commenced by filing, with
a court of first instance, of a complaint for the collection of taxes. This was true at the time of the
approval of Commonwealth Act No. 456, on June 15, 1939. However, Republic Act No. 1125 has
vested the Court of Tax Appeals, not only with exclusive appellate jurisdiction to review decisions
of the Collector (now Commissioner) of Internal Revenue in cases involving disputed
assessments, like the one at bar, but, also, with authority to decide "all cases involving disputed
assessments of Internal Revenue taxes or customs duties pending determination before the court
of first instance" at the time of the approval of said Act, on June 16, 1954 (Section 22, Republic Act
No. 1125). Moreover, this jurisdiction to decide all cases involving disputed assessments of internal
revenue taxes and customs duties necessarily implies the power to authorize and sanction the
collection of the taxes and duties involved in such assessments as may be upheld by the Court of
Tax Appeals. At any rate, the same now has the authority formerly vested in courts of first instance
to hear and decide cases involving disputed assessments of internal revenue taxes and customs
duties. Inasmuch as those cases filed with courts of first instance constituted judicial actions, such
is, likewise, the nature of the proceedings before the Court of Tax Appeals, insofar as sections 316
and 332 of the Tax Code are concerned.
The question whether the sum of P16,860.31 is due from Gancayco as deficiency income tax for
1949 hinges on the validity of his claim for deduction of two (2) items, namely: (a) for farming
expenses, P27,459.00; and (b) for representation expenses, P8,933.45.
Section 30 of the Tax Code partly reads:
(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; traveling
expenses while away from home in the pursuit of a trade or business; and rentals or
other payments required to be made as a condition to the continued use or possession,
for the purposes of the trade or business, of property to which the taxpayer has not
taken or is not taking title or in which he has no equity. (Emphasis supplied.)
Referring to the item of P27,459, for farming expenses allegedly incurred by Gancayco, the
decision appealed from has the following to say:
No evidence has been presented as to the nature of the said "farming expenses" other
than the bare statement of petitioner that they were spent for the "development and
cultivation of (his) property". No specification has been made as to the actual amount
spent for purchase of tools, equipment or materials, or the amount spent for
improvement. Respondent claims that the entire amount was spent exclusively
for clearing and developing the farm which were necessary to place it in a productive
state. It is not, therefore, an ordinary expense but a capitol expenditure. Accordingly, it
is not deductible but it may be amortized, in accordance with section 75 of Revenue
Regulations No. 2, cited above. See also, section 31 of the Revenue Code which
provides that in computing net income, no deduction shall in any case be allowed in
respect of any amount paid out for new buildings or for permanent improvements,
or betterments made to increase the value of any property or estate. (Emphasis
supplied.)
We concur in this view, which is a necessary consequence of section 31 of the Tax Code, pursuant
to which:
(a) General Rule In computing net income no deduction shall in any case be allowed
in respect of
(1) Personal, living, or family expenses;
(2) Any amount paid out for new buildings or for permanent improvements,
or betterments made to increase the value of any property or estate;
(3) Any amount expended in restoring property or in making good the exhaustion
thereof for which an allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering the life of any officer or
employee, or any person financially interested in any trade or business carried on by
the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy. (Emphasis supplied.)
Said view is, likewise, in accord with the consensus of the authorities on the subject.
Expenses incident to the acquisition of property follow the same rule as applied to
payments made as direct consideration for the property. For example, commission paid
in acquiring property are considered as representing part of the cost of the property
acquired. The same treatment is to be accorded to amounts expended for maps,
abstracts, legal opinions on titles, recording fees and surveys. Other non-deductible
expenses include amounts paid in connection with geological
explorations, development and subdividing of real estate; clearing and grading;
restoration of soil, drilling wells, architects's fees and similar types of expenditures. (4
Merten's Law of Federal Income Taxation, Sec. 25.20, pp. 348-349; see also sec. 75 of
the income Regulation of the B.I.R.; Emphasis supplied.)
The cost of farm machinery, equipment and farm building represents a capital
investment and is not an allowable deduction as an item of expense. Amounts
expended in the development of farms, orchards, and ranches prior to the time when
the productive state is reached may be regarded as investments of capital. (Merten's
Law of Federal Income Taxation, supra, sec. 25.108, p. 525.)
Expenses for clearing off and grading lots acquired is a capital expenditure,
representing part of the cost of the land and was not deductible as an expense. (Liberty
Banking Co. v. Heiner 37 F [2d] 703 [8AFTR 100111] [CCA 3rd]; The B.L. Marble Chair
Company v. U.S., 15 AFTR 746).
An item of expenditure, in order to be deductible under this section of the statute
providing for the deduction of ordinary and necessary business expenses, must
fall squarely within the language of the statutory provision. This section is intended
primarily, although not always necessarily, to cover expenditures of a recurring nature
where the benefit derived from the payment is realized and exhausted within the
taxable year. Accordingly, if the result of the expenditure is the acquisition of an
asset which has an economically useful life beyond the taxable year, no deduction of
such payment may be obtained under the provisions of the statute. In such cases, to
the extent that a deduction is allowable, it must be obtained under the provisions of the
statute which permit deductions for amortization, depreciation, depletion or loss. (W.B.
Harbeson Co. 24 BTA, 542; Clark Thread Co., 28 BTA 1128 aff'd 100 F [2d] 257 [CCA
3rd, 1938]; 4 Merten's Law of Federal Income Taxation, Sec. 25.17, pp. 337-338.)
Gancayco's claim for representation expenses aggregated P31,753.97, of which P22,820.52 was
allowed, and P8,933.45 disallowed. Such disallowance is justified by the record, for, apart from the
absence of receipts, invoices or vouchers of the expenditures in question, petitioner could not
specify the items constituting the same, or when or on whom or on what they were incurred. The
case of Cohan v. Commissioner, 39 F (2d) 540, cited by petitioner is not in point, because in that
case there was evidence on the amounts spent and the persons entertained and the necessity of
entertaining them, although there were no receipts an vouchers of the expenditures involved
therein. Such is not the case of petitioner herein.
Being in accordance with the facts and law, the decision of the Court of Tax Appeals is hereby
affirmed therefore, with costs against petitioner Santiago Cancayco. It is so ordered.
G.R. No. L-25299 July 29, 1969
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ITOGON-SUYOC MINES, INC., and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete
and Special Attorney Oscar S. de Castro for petitioner.
Ramon O. Reynoso, Jr. and Melchor R. Flores for respondents.
FERNANDO, J.:
The question presented for determination in this petition for the review of a decision of the Court of
Tax Appeals, one that is of first impression, would not have arisen had respondent Itogon-Suyoc
Mines, Inc., the taxpayer involved, duly paid in full its liability according to its income tax return for
the fiscal year 1960-61. Instead, it deducted right away the amount represented by claim for refund
filed eight (8) months back, for the previous year's income tax, for which it was not liable at all, so it
alleged, as it suffered a loss instead, a claim subsequently favorably acted on by petitioner
Commissioner of Internal Revenue but after the date of such payment of the 1960-1961 tax.
Accordingly, an interest in the amount of P1,512.83 was charged by petitioner Commissioner of
Internal Revenue on the sum withheld on the ground that no deduction on such refund should be
allowed before its approval. When the matter was taken up before the Court of Tax Appeals, the
above assessment representing interest was set aside in the decision of September 30, 1965. That
is the decision now an appeal by petitioner Commissioner of Internal Revenue. We sustain the
Court of Tax Appeals.
Respondent Itogon-Suyoc Mines, Inc., a mining corporation duly organized and existing in
accordance with the laws of the Philippines, filed on January 13, 1961, its income tax return for the
fiscal year 1959-1960. It declared a taxable income of P114,368.04 and a tax due thereon
amounting to P26,310.41, for which it paid on the same day, the amount of P13,155.20 as the first
installment of the income tax due. On May 17, 1961, petitioner filed an amended income tax
return, reporting therein a net loss of P331,707.33. It thus sought a refund from the Commissioner
of Internal Revenue, now the petitioner.1wph1.t
On February 14, 1962, respondent Itogon-Suyoc Mines, Inc. filed its income tax return for the fiscal
year 1960-1961, setting forth its income tax liability to the tune of P97,345.00, but deducting the
amount of P13,155.20 representing alleged tax credit for overpayment of the preceding fiscal year
1959-1960. 0n December 18, 1962, petitioner Commissioner of Internal Revenue assessed
against the respondent the amount of P1,512.83 as 1% monthly interest on the aforesaid amount
of P13,155.20 from January 16, 1962 to December 31, 1962. The basis for such an assessment
was the absence of legal right to deduct said amount before the refund or tax credit thereof was
approved by petitioner Commissioner of Internal Revenue. 1
Such an assessment was contested by respondent before the Court of Tax Appeals. As already
noted, it prevailed. The decision of September 30, 1965, now on appeal, explains why. Thus:
"Respondent assessed against the petitioner the amount of P1,512.83 as 1% monthly interest on
the sum of P13,155.20 from January 16, 1962 to December 31, 1962 on the ground that petitioner
had no legal right to deduct the said amount from its income tax liability for the fiscal year 1960-
1961 until the refund or tax credit thereof has been approved by respondent. As aforestated,
petitioner paid the amount of P13,155.20 as first installment on its reported income tax liability for
the fiscal year 1959-1960. But, it turned out that instead of deriving a net gain, it sustained a net
loss during the said fiscal year. Accordingly, it filed an amended income tax return and a claim for
the refund of the sum of P13,155.20, which sum it subsequently, deducted from its income tax
liability for the succeeding fiscal year 1960-1961. The overpayment for the fiscal year 1959-1960
and the deduction of the overpaid amount from its 1960-1961 tax liability are not denied by
respondent. In this circumstance, we find it unfair and unjust for the Commissioner to exact an
interest on the said sum of P13,155.20, which, after all, was paid to and received by the
government even before the incidence of the tax in question." 2
That is the question before us in this petition for review by the Commissioner of Internal Revenue.
He argues that the Court of Tax Appeals should not have absolved respondent corporation "from
liability to pay the sum of P1,512.83 as 1% monthly interest for delinquency in the payment of
income tax for the fiscal year 1960-1961." 3 As noted at the outset, we find such contention far from
persuasive.
It could not be error for the Court of Tax Appeals, considering the admitted fact of overpayment,
entitling respondent to refund, to hold that petitioner should not repose an interest on the aforesaid
sum of P13,155.20 "which after all was paid to and received by the government even before the
incidence of the tax in question." It would be, according to the Court of Tax Appeals, "unfair and
unjust" to do so. We agree but we go farther. The imposition of such an interest by petitioner is not
supported by law.
The National Internal Revenue Code provides that interest upon the amount determined as a
deficiency shall be assessed and shall be paid upon notice and demand from the Commissioner of
Internal Revenue at the specified. 4It is made clear, however, in an earlier provision found in the
same section that if in any preceding year, the taxpayer was entitled to a refund of any amount due
as tax, such amount, if not yet refunded, may be deducted from the tax to be paid. 5
There is no question respondent was entitled to a refund. Instead of waiting for the sum involved to
be delivered to it, it deducted the said amount from the tax that it had to pay. That it had a right to
do according to the law. It is true a doubt could have arisen due to the fact that as of the time such
a deduction was made, the Commissioner of Internal Revenue had not as yet approved such a
refund. It is an admitted fact though that respondent was clearly entitled to it, and petitioner did not
allege otherwise. Nor could he do so. Under all the circumstances disclosed therefore, the
applicability of the legal provision allowing such a deduction from the amount of the tax to be paid
cannot be disputed.

This conclusion is in accordance with the principle announced in Castro v. Collector of Internal
Revenue. 6 While the case is not directly in point, it yields an implication that makes even more
formidable the case for respondent taxpayer. As there held, the imposition of the monthly interest
was considered as not constituting a penalty "but a just compensation to the state for the delay in
paying the tax, and for the concomitant use by the taxpayer of funds that rightfully should be in the
government's hands ...."

What is therefore sought to be avoided is for the taxpayer to make use of funds that should have
been paid to the government. Here, in view of the overpayment for the fiscal year 1959-1960, the
sum of P13,155.20 had already formed part of the public funds. It cannot be said, therefore, that
respondent taxpayer was guilty of any delay enabling it to utilize a sum of money that should have
been in the government treasury.

How then, as a matter of pure law, even if we lay to one side the demands of fairness and justice,
which to the Court of Tax Appeals seem to be uppermost, can its decision be overturned?
Accordingly, we find no valid ground for this appeal.

WHEREFORE, the decision of September 30, 1965 of the Court of Tax Appeals is affirmed.
Without pronouncement as to costs.1wph1.t

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Capistrano and
Teehankee, JJ., concur.
Barredo, J., took no part.