COMMISSIONER OF INTERNAL REVENUE

,

G.R. No. 159647 Petitioner, Present:

it operated six (6) drugstores under the business name and style ‗Mercury Drug.‘ ―From January to December 1996, respondent granted twenty (20%) percent sales discount to qualified senior citizens on their purchases of medicines pursuant to Republic Act No. [R.A.] 7432 and its Implementing Rules and Regulations. For the said period, the amount allegedly representing the 20% sales discount granted by respondent to qualified senior citizens totaled P904,769.00. ―On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring therein that it incurred net losses from its operations. ―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 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 [5] a Decision dismissing respondent‘s Petition for lack of merit. In said decision, the [CTA] justified its ruling with the following ratiocination: ‗x xx, if no tax has been paid to the government, 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 tax is made by means of a claim for refund or tax credit, before recovery is allowed[,] it must be first established that there was an actual collection and receipt by the government of the tax sought to be recovered. x xx. ‗x xx xxx xxx ‗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, if there is no tax liability, tax credit is not available.‘ ―Respondent lodged a Motion for Reconsideration. The [6] [CTA], in its assailed resolution, granted respondent‘s 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

- versus -

Panganiban, J., Chairman, Sandoval-Gutierrez, Corona, Carpio Morales, and Garcia, JJ

CENTRAL LUZON DRUG Promulgated: CORPORATION, Respondent. April 15, 2005 x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

T he 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax deduction from the gross income or gross sale of the establishment concerned. 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 Before us is a Petition for Review under Rule 45 of the Rules of Court, [2] seeking to set aside the August 29, 2002 Decision and the August 11, 2003 [3] Resolution of the Court of Appeals (CA) in CA-GR SP No. 67439. The assailed Decision reads as follows: ―WHEREFORE, premises considered, the Resolution [4] appealed from is AFFIRMED in toto. No costs.‖ The assailed Resolution denied petitioner‘s Motion for Reconsideration. The Facts The CA narrated the antecedent facts as follows: ―Respondent is a domestic corporation primarily engaged in retailing of medicines and other pharmaceutical products. In 1996,
[1]

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 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 CTA‘s 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 government.‘ Tax refunds or credits do not exclusively pertain to illegally collected or erroneously paid taxes as they may be other circumstances where a refund is warranted. The tax refund provided under Section 229 deals exclusively with illegally collected or erroneously paid taxes but there are other possible situations, such as the refund of excess estimated corporate quarterly income tax paid, or that of excess input tax paid by a VATregistered person, or that of excise tax paid on goods locally produced or manufactured but actually exported. The standards and mechanics for the grant of a refund or credit under these situations are different from that under Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet another instance of a tax credit and it does not in any way refer to illegally collected or erroneously paid taxes, x x [7] x.‘‖

―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 [9] entitled to a refund.‖

These two issues may be summed up in only one: whether respondent, despite incurring a net loss, may still claim the 20 percent sales discount as a tax credit. The Court’s Ruling The Petition is not meritorious.

Sole Issue: Claim of 20 Percent Sales Discount as Tax Credit Despite Net Loss
[10]

Section 4a) of RA 7432 grants to senior citizens the privilege of obtaining a 20 percent discount on their purchase of medicine from any private establishment in [11] [12] the country. The latter may then claim the cost of the discount as a tax credit. But can such credit be claimed, even though an establishment operates at a loss? We answer in the affirmative. Tax Credit versus Tax Deduction Although the term is not specifically defined in our Tax Code, tax credit generally refers to an amount that is ―subtracted directly from one‘s total tax [14] [15] liability.‖ It is an ―allowance against the tax itself‖ or ―a deduction from what is [16] owed‖ by a taxpayer to the government. Examples of tax credits are withheld [17] taxes, payments of estimated tax, and investment tax credits. Tax credit should be understood in relation to other tax concepts. One of these [18] is tax deduction -- defined as a subtraction ―from income for tax purposes,‖ or an amount that is ―allowed by law to reduce income prior to [the] application of the tax [19] rate to compute the amount of tax which is due.‖ An example of a tax deduction is [20] any of the allowable deductions enumerated in Section 34 of the Tax Code. A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including -- whenever applicable -- the income tax that is determined [21] after applying the corresponding tax rates to taxable income. A tax deduction, on [22] the other, reduces the income that is subject to tax in order to arrive at taxable [23] income. 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 computed; a tax deduction, before. Tax Liability Required
[13]

Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to issue a tax credit certificate in favor of respondent in the reduced amount of P903,038.39. It 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 tantamount to an unintended benefit from the law, but rather a just compensation for the taking of private property for public use. Hence this Petition.
[8]

The Issues

Petitioner raises the following issues for our consideration:

for Tax Credit Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax credit can be applied. Without that liability, any tax creditapplication will be useless. There will be no reason for deducting the latter when there is, to begin with, no existing obligation to the government. However, as will be presented shortly, the existence of a tax credit or its grant by law is not the same as the availment or use of such credit. While the grant is mandatory, the availment or use is not. 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 [24] credit can be applied. For the establishment to choose the immediate availment of a tax credit will be premature and impracticable. Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has granted without conditions a tax credit benefit to all covered establishments. Although this tax credit benefit is available, it need not be used by losing ventures, since there is 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 its nature, the tax credit may still be deducted from a future, not a present, tax liability, without which it does not have any use. In the meantime, it need not move. But it breathes. Prior Tax Payments Not Required for Tax Credit While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. The Tax Code is in fact replete with provisions granting or allowing tax credits, even though no taxes have been previously paid. 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 provision for donor‘s taxes -- again when paid to a foreign country -- in computing for the donor’s tax due. The tax credits in both instances allude to the prior payment of taxes, even if not made to our government. Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions -- whether or not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of 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 -- 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 to only eight percent of the value of a VAT-registered person‘s beginning inventory of goods, materials and supplies, when such amount -- as computed -- is higher than [25] the actual VAT paid on the said items. Clearly from this provision, the tax creditrefers to an input tax that is either due 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. In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed. 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 payments are needed for the use of the tax credit. More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may, under Section 112(A), apply for the issuance of a tax creditcertificate for the amount of creditable input taxes merely due -- again not necessarily paid to -- the government and attributable to such sales, to the extent that [26] the input taxes have not been applied against output taxes. Where a taxpayer is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the amount of creditable input taxes due that are not directly and entirely attributable to any one of these transactions shall be proportionately allocated on the basis of the volume of sales. Indeed, in availing of such tax credit for VAT purposes, this provision -- as well as the one earlier mentioned -- shows that the prior payment of taxes is not a requisite. 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, the imposition of a final withholding tax rate on cash and/or property dividends received by a nonresident foreign corporation from a domestic corporation is subjected to the condition that a foreign tax credit will be given by the domiciliary country in an amount equivalent to taxes that are merely [27] deemed paid. 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 deduction from the corresponding tax liability. Besides, it is not our government but the domiciliary country that credits against the income tax payable to the latter by the foreign [28] corporation, the tax to be foregone or spared. In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits, against the income tax imposable under Title II, the amount of income taxes merely incurred -- not necessarily paid -- by a domestic corporation during a taxable year in any foreign country. Moreover, Section 34(C)(5) provides that for such taxes incurred but not paid, a tax credit may be allowed, subject to the condition precedent that the taxpayer shall simply give a bond with sureties satisfactory to and approved by petitioner, in such sum as may be required; and further conditioned upon payment by the taxpayer of any tax found due, upon petitioner‘s redetermination of it. In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special laws that grant or allow tax credits, even though no prior tax payments have been made. Under the treaties in which the tax credit method is used as a relief to avoid double taxation, income that is taxed in the state of source is also taxable in the state of residence, but the tax paid in the former is merely allowed as a credit against the [29] tax levied in the latter. Apparently, payment is made to the state of source, not the state of residence. No tax, therefore, has been previously paid to the latter.

Under special laws that particularly affect businesses, there can also be tax credit incentives. To illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as amended by Batas PambansaBlg. (BP) 391, include tax credits equivalent to either five percent of the net value earned, or five or ten percent [30] of the net local content of exports. In order to avail of such credits under the said law and still achieve its objectives, no prior tax payments are necessary. From all the foregoing instances, it is evident that prior tax payments are not indispensable to the availment of a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not require prior tax payments by private [31] [32] establishments concerned. However, we do not agree with its finding that the carry-over of tax credits under the said special law to succeeding taxable periods, and even their application against internal revenue taxes, did not necessitate the existence of a tax liability. The examples above show that a tax liability is certainly important in the availment or use, not 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 are entitled to the tax credit provided for under RA 7432, since the law itself accords that unconditional benefit. However, for the losing establishment to immediately apply such credit, where no tax is due, will be an improvident usance. Sections 2.i and 4 of Revenue Regulations No. 2-94 Erroneous RA 7432 specifically allows private establishments to claim as tax credit the [33] amount of discounts they grant. In turn, the Implementing Rules and Regulations, [34] issued pursuant thereto, provide the procedures for its availment. To deny such credit, despite the plain mandate of the law and the regulations carrying out that mandate, is indefensible. First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing the 20 percent discount that ―shall be de ducted by the said establishments from their gross income for income tax purposes and from their gross [35] sales for value-added tax or other percentage tax purposes.‖ 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 been clarified by the revenue regulations. By ordinary acceptation, a discount is an ―abatement or reduction made from [36] the gross amount or value of anything.‖ To be more precise, it is in business [37] parlance ―a deduction or lowering of an amount of money;‖ or ―a reduction from the [38] full amount or value of something, especially a price.‖ In business there are many kinds of discount, the most common of which is that affecting the income [39] statement or financial report upon which the income tax is based. Business Discounts Deducted from Gross Sales A cash discount, for example, is one granted by business establishments [40] to credit customers for their prompt payment. It is a ―reduction in price offered to

the purchaser if payment is made within a shorter period of time than the maximum [41] time specified.‖ Also referred to as a sales discount on the part of the seller and apurchase discount on the part of the buyer, it may be expressed in such terms as [42] ―5/10, n/30.‖ A quantity discount, however, is a ―reduction in price allowed for purchases made in large quantities, justified by savings in packaging, shipping, and [43] [44] handling.‖ It is also called a volume or bulk discount. A ―percentage reduction from the list price x xx allowed by manufacturers to [45] wholesalers and by wholesalers to retailers‖ is known as a trade discount. No entry for it need be made in the manual or computerized books of accounts, since the [46] purchase or sale is already valued at the net price actually charged the buyer. The purpose for the discount is to encourage trading or increase sales, and the prices at [47] which the purchased goods may be resold are also suggested. Even a chain [48] discount -- a series of discounts from one list price -- is recorded at net. Finally, akin to a trade discount is a functional discount. It is ―a supplier‘s price discount given to a purchaser based on the [latter‘s] role in the [former‘s] distribution [49] system.‖ This role usually involves warehousing or advertising. Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally accepted accounting principles (GAAP) in the country, [50] this type of discount is reflected in the income statement as a line item deducted -along with returns, allowances, rebates and other similar expenses -- from gross [51] sales to arrive at net sales. This type of presentation is resorted to, because the accounts receivable and sales figures that arise from sales discounts, -- as well as from quantity, volume or bulk discounts-- are recorded in the manual and computerized books of accounts and reflected in the financial statements at the gross [52] amounts of the invoices. This manner of recording credit sales -- known as the gross method -- is most widely used, because it is simple, more convenient to [53] apply than the net method, and produces no material errors over time. However, under the net method used in recording trade, chain or functional discounts, only the net amounts of the invoices -- after the discounts have been [54] deducted -- are recorded in the books of accounts and reflected in the financial [55] statements. A separate line item cannot be shown, because the transactions themselves involving bothaccounts receivable and sales have already been entered into, net of the said discounts. The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to amounts whose sum -along with sales [56] returns, allowances and cost of goods sold -- is deducted from gross sales to come [57] [58] up with the gross income, profit or margin derived from business. In another provision therein, sales discounts that are granted and indicated in the invoices at the time of sale -- and that do not depend upon the happening of any future event -- may [59] be excluded from the gross sales within the same quarter they were given. While determinative only of the VAT, the latter provision also appears as a suitable reference point for income tax purposes already embraced in the former. After all, these two provisions affirm that sales discounts are amounts that are always deductible from gross sales.

Reason for the Senior Citizen Discount: The Law, Not Prompt Payment A distinguishing feature of the implementing rules of RA 7432 is the private establishment‘s outright deduction of the discount from the invoice price of the [60] medicine sold to the senior citizen. It is, therefore, expected that for each retail sale made under this law, the discount period lasts no more than a day, because such discount is given -- and the net amount thereof collected -- immediately upon [61] perfection of the sale. Although prompt payment is made for an arm‘s -length transaction by the senior citizen, the real and compelling reason for the private establishment giving the discount is that the law itself makes it mandatory. What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of the above discounts in particular. Prompt payment is not the reason for (although a necessary 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, under the revenue regulations promulgated by our tax authorities, this benefit has been erroneously likened and confined to a sales discount. To a senior citizen, the monetary effect of the privilege may be the same as that resulting from a sales discount. However, to a private establishment, the effect is different from a simple 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 be treated as a tax deduction. To stress, the effect of a sales discount on the income statement and income tax return of an establishment covered by RA 7432 is different from that resulting from theavailment or use of its tax credit benefit. While the former is a deduction before, the latter is a deduction after, 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 discount. Ubilex non distinguit, necnosdistingueredebemus. Where the law does not distinguish, we ought not to distinguish. Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible from gross income for income tax purposes, or from gross sales for VAT or 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 from gross sales in order to compute the gross income in the income statement and cannot be deducted again, even for purposes of computing the income tax. 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 option to avail of the tax credit benefit depends upon the existence of a tax liability, but to limit the benefit to a sales discount -- which is not even identical to the discount privilege that is granted by law -- does not define it at all and serves no useful purpose. The definition must, therefore, be stricken down. Laws Not Amended

by Regulations Second, the law cannot be amended by a mere regulation. In fact, a regulation [62] that ―operates to create a rule out of harmony with the statute is a mere nullity‖; it cannot prevail. It is a cardinal rule that courts ―will and should respect the contemporaneous construction placed upon a statute by the executive officers whose duty it is to [63] enforce it x x x.‖ In the scheme of judicial tax administration, the need for certainty [64] and predictability in the implementation of tax laws is crucial. Our tax authorities fill in the details that ―Congress may not have the opportunity or competence to [65] provide.‖ The regulations these authorities issue are relied upon by taxpayers, who [66] are certain that these will be followed by the courts. Courts, however, will not uphold these authorities‘ interpretations when clearly absurd, erroneous or improper. In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 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 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 [67] legislature. In case of conflict, the law must prevail. A ―regulation adopted pursuant to [69] law is law.‖ Conversely, a regulation or any portion thereof not adopted pursuant to [70] law is no law and has neither the force nor the effect of law. Availment of Tax Credit Voluntary Third, the word may in the text of the statute implies that the availability of [72] the tax credit benefit is neither unrestricted nor mandatory. There is no absolute right conferred upon respondent, or any similar taxpayer, to avail itself of the tax credit remedy 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 [73] control and discretion of the taxpayer.‖ For the tax authorities to compel respondent to deduct the 20 percent discount from either its gross income or its gross [74] sales is, therefore, not only to make an imposition without basis in law, but also to blatantly contravene the law itself. What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not 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 an act of beneficence, an expression of its social conscience.
[71] [68]

however. These objectives are consonant with the constitutional policy of making [87] ―health x xx services available to all the people at affordable cost‖ and of giving [88] ―priority for the needs of the x xx elderly. a private establishment that merely breaks even -without the discounts yet -.cannot be considered as just compensation. not a deduction. Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State. however. such issuance -. respondent is made to suffer the consequences of being immediately deprived of its revenues while awaiting actual receipt.on the responsibility of the private hospitals and drugstores. hindiba? SEN. profitgenerating businesses will be put in a better position if they avail themselves of tax credits denied those that are losing. and mga discounts ponila affecting government and public institutions. the power to tax has indeed become a most effective tool to realize [83] social justice.‖ For this reason. By the way. Grant of Tax Credit Intended by the Legislature Fifth. no cash outlay is required from the government for theavailment or use of such credit. then the tax credit can easily be applied. rather than as a deduction from gross income. before that ano. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. Where the words of a statute are clear. If. and no administrative body can alter that fact. Neither does it allow our tax administrators to expand or contract the legislative mandate. Furthermore. 1992 of the Bicameral Conference Committee Meeting on Social Justice. the credit can never be applied and will be lost altogether. ADVENTO. This term refers not only to the issuance of a tax creditcertificate indicating the correct amount of the discounts given.when not done within a reasonable time from the grant of the discounts -. of the equivalent amount it needs to [79] cope with the reduction in its revenues. were it not for RA 7432. Besides. ANGARA. In fact. As a result of the 20 percent discount imposed by RA 7432.‖ In recent years.i and 4 of RR 2-94.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent domain. To put it differently. it must be given its literal meaning and applied without attempted [76] interpretation. the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for public [77] use. RA 7432 does not give respondent the unfettered right to avail itself of the credit whenever it pleases. Sections 2. because no taxes are due from the latter. respondent becomes entitled to a just compensation. Unico). it is the existence or the lack of a tax liability that determines whether the cost of the discounts can be used as a tax credit. Equivalent to the payment of property taken by the State. public welfare. it will realize that the tax credit limitation under RR 2-94 is inutile. but also to the promptness in its release.Granting that there is a tax liability and respondent claims such cost as a tax credit. so. but held synonymous with public interest. the taxation power can also be used as an implement for the exercise [80] of the power of eminent domain. if not improper. THE CHAIRMAN. So. through the certificate. but rather from the private establishments concerned. and the equitable distribution of wealth. [85] MS. We quote from those deliberations as follows: "THE CHAIRMAN (Rep. plain and free from ambiguity. RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the community as a whole and to establish a program beneficial to [86] them. Accordingly. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments concerned. The concept of public use is no longer confined to the traditional notion of use by the public. the credit cannot be [75] used and will just have to be carried over and revalidated accordingly.‖ Sections 2. which finalized RA 7432. The deliberations on February 5. Aside from the observation we have already raised earlier. The same effect is expected if its mark-up is less than 20 percent. The discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. Unico). public welfare. . Oo. it will also be grossly unfair to an establishment if the discounts will be treated merely as deductions from either its gross income or its gross sales. It is in the tax creditthat our legislators find support to realize social justice. contradict these constitutional policies and statutory objectives. the business continues to operate at a loss and no other taxes are due.‖ Tax Credit Benefit Deemed Just Compensation Fourth. (Rep. The social justice consecrated in our [C]onstitution [is] not intended to take away rights from a person and give them to [84] another who is not entitled thereto. [78] and public convenience. I think we incorporated there a provision na . Tax measures are but ―enforced contributions [81] [82] exacted on pain of penal sanctions‖ and ―clearly imposed for a public purpose. In effect. If there is none. a just compensation for income that is taken away from respondent becomes necessary. about deductions from taxable income. I think we have to put in also a provision here about the deductions from taxable income of that private hospitals. Worse. ―The ‗plain meaning rule‘ or verbalegis in statutory construction is thus applicable x xx. disclose the true intent of our legislators to treat the sales discounts as a tax credit. thus compelling it to close shop.will surely start to incur losses because of such discounts. In other words. Congress has allowed all private establishments a simple tax credit. di baganon 'yan? Kaya langpo sir. While it is a declared commitment under Section 1 of RA 7432. social justice ―cannot be invoked to trample on the rights of property owners who under our Constitution and laws are also entitled to protection. Operating at a loss through no fault of its own. public benefit. and if all its sales come from retail purchases by senior citizens.

recreation centers. ―[w]here there are two statutes. et cetera. 'di pa banaisamanatin? Oo. AQUINO. REP.the terms of the general broad enough to include the matter provided for in the special -. Special Law Over General Law Sixth and last. the Petition is hereby DENIED. REP. Unico). To capture that thought. SEN. as discussed above. REP. the private hospitals can claim the expense as a tax credit. ANGARA. ADVENTO. SEN. Sakuwanlang yon. The assailed Decision and Resolution of the Court of Appeals AFFIRMED. (Rep. SEN. Letter A. SEN. . general in its terms and not expressly repealing a prior special statute. SEN. ANGARA. Hospitals ba o lahatng establishments na covered. the other as the law of a particular [92] case.Yung isiningitnatin? Singitnapobayung 15% on credit. ANGARA. may claim the cost as a tax credit. Okay. provided that said establishments provided that private establishments REP. When the former states that a tax credit may be claimed. ANGARA. No pronouncement as to costs. the Tax Code -. AQUINO SEN. Ganonba 'yon? Dahilkung government.‖ RA 7432 is an earlier law not expressly repealed by. ANGARA. RA 7432 is a special law that should prevail over the Tax Code . then the requirement of prior tax payments under certain provisions of the latter. As a tax credit [rather] than a kuwan deduction. hindi pa. THE CHAIRMAN Hindi pa. ANGARA.a general law. MS.‖ In addition. REP. Unico). Yah could be allowed as deductions in the perpetrations of (inaudible) income.‖ ―It is a canon of statutory construction that a later statute. SO ORDERED. ―x xx [T]he rule is that on a specific matter the special law shall prevail over the general law. as private hospitals lang. Okay. ANGARA. one as a general law of the land. Yung ang proposal ni Senator Shahani. which shall be resorted to only to supply deficiencies in [90] the former. You want to insert that? (Rep. Di subject to style nalangsa Letter [89] A". we'll say the grant of 20% discount from all establishments et cetera. AQUINO. No provision of any revenue regulation can supplant or modify the acts of Congress. In the case of private hospitals they got the grant of 15% discount. and therefore remains an exception to. SEN.Alisinnanatin 'Yung kuwan kung ganon. will ordinarily not affect the [93] special provisions of such earlier statute. WHEREFORE. AQUINO. Neither can [94] the instances of or references to a tax deduction under the Tax Code be made to restrict RA 7432. they don't need to claim it. (Rep. Anobayung establishments na covered? Restaurant lodging houses. tax credit. THE CHAIRMAN. SEN. provided that. ANGARA.a later law. THE CHAIRMAN. e. Puwedena. (Rep. (Rep. REP. I-tax credit nalangnatinparawalang cash-out ano? Oo. SEN. Tax credit.Yung about the private hospitals. THE CHAIRMAN. Unico) Ah. (inaudible/did not use the microphone). ANGARA. REP. cannot be made to apply. Yah. Can we go back to Section 4 ha? Oho. Tama. SEN. THE CHAIRMAN. AQUINO. AQUINO. Unico). the earlier special and the later general -. Okay. All establishments covered siguro? From all establishments.puwedenaponatinghindiisamayungmga less deductions ng taxable income.the fact that one is special and the other is general creates a presumption that the special is to be considered as remaining an exception to the [91] general. AQUINO. ANGARA. Unico). Sige Okay.

In the latter case.193.COMMISSIONER OF INTERNAL REVENUE. 60057.A. No. Pursuant to Revenue Regulations No. 7432.014.00 Income Tax Payable (P 150.621. Also. 2001. may be carried over to the next taxable period if there is no current tax liability. end 8.585. It concluded that the 20% discount given to senior citizens which is treated as a tax credit pursuant to Sec. No. respondent filed a claim for refund in the amount of P150.193.A. SP No. petitioner granted a 20% discount on the sale of medicines to qualified senior citizens amounting to P219. 2-94 implementing R. respondent filed with the CA a Petition for Review on August 3.963 in its corporate income tax return. respondent did not pay income tax for 1995. no refund can be granted as no tax was erroneously. Chairperson.778 should be applied as a tax credit.00 Less: Cost of Sales Merchandise Inventory.00 Gross Profit P 3.A.00 Gross Sales P 37.232. beg P 1. 4(a) of R. 7432. Petitioner.138. 1994. 7432. as such. x ---------------------------------------------------------------------------------------. J. 2001. 4(a) of R.R. 2000. AZCUNA.00 Total Income 3.778. claiming that according to Sec. it opened three (3) drugstores as a franchisee under the business name and style of ―Mercury Drug.145.740. on December 27. 1996. 4(a) of R..00 Income Tax (35%) 69.585. Promulgated: June 26.748. 1998. In 1995.00 Net Income Before Tax P 217. the amount of P150.778.00 Purchases 41. Grant Benefits and Special Privileges and for other Purposes‖ otherwise known as the Senior Citizens Act. respondent deducted the total amount of P219. respondent reported a net loss of P20. the tax credit will only be to the extent of the tax [3] liability. 2006 Net Sales Add: - CENTRAL LUZON DRUG CORPORATION.416. Subsequently.778 from its gross income for the taxable year 1995.856. On April 24.199. the amount of P219. entitled ―An Act to Maximize the Contribution of Senior Citizens to Nation Building. JJ. Respondent. the CTA dismissed the petition. SANDOVAL-GUTIERREZ. entitled ―Central Luzon Drug Corporation v.193 claimed as a refund represents the tax credit allegedly due to respondent under R.00 Cost of 20% Discount to Senior Citizens 219. For said taxable period.R.193.778.234. and GARCIA.x DECISION AZCUNA. the same cannot apply when there is no tax liability or the amount of the tax credit is greater than the tax due.00 Less: Tax Credit (Cost of 20% Discount to Senior Citizens) 219.00) As shown above. In view of this. declaring that even if the law treats the 20% sales discounts granted to senior citizens as a tax credit.807.557. of the Tax Code. the law does not state that a refund can be claimed by the private establishment concerned as an alternative to the tax credit.‖ granting herein respondent Central Luzon Drug Corporation‘s claim for tax credit equal to the amount of the 20% discount that it extended to senior citizens on the latter‘s purchase of medicines pursuant to Section 4(a) of Republic Act (R.230. Commissioner of Internal Revenue. the CA held: . the CA rendered a Decision stating that Section 229 of the Tax Code does not apply in this case. illegally and actually collected based on the provisions of Section 230. 148512 Present: PUNO. 7432. No. in conformity to the mandate of Sec.00 33. thus: [1] P 37.00 Merchandise Inventory. of the Court of Appeals (CA) in CAG. No. CORONA. The antecedents are as follows: Central Luzon Drug Corporation has been a retailer of medicines and other pharmaceutical products since December 19. 7432.978. versus – G. No. J.00 Operating Expenses 3. Thus. 2000.A. No.: This is a petition for review under Rule 45 of the Rules of Court seeking the nullification of the Decision. dated May 31.377.) No. Furthermore. 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.521. now Section 229.964.00 Miscellaneous Income 39. As a consequence.‖ respondent filed a Petition for Review with the Court of Tax Appeals (CTA) on March 18.A.00) Income Tax Actually Paid -0Tax Refundable/Overpaid Income Tax (P 150.‖ For the period January 1995 to December 1995. On May 31.A. 7432 is considered just compensation and.014. Since the Commissioner of Internal Revenue ―was not able to decide the claim for refund on [2] time.

229 of the Tax Code does not apply to cases that fall under Sec.R. – 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. 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.when claimed – shall be treated as a [8] reduction from any tax liability. hotels and similar lodging establishments. restaurants and recreation centers and purchase of medicines anywhere in the country: Provided. is AFFIRMED. a regulation that ―operates [10] to create a rule out of harmony with the statute is a mere nullity. 2001. it means that the amount -. if any. for purposes of clarity. the tax credit can be availed of and carried over to the next taxable year. A new one is entered granting petitioner‘s claim for tax credit in the amount of Php: 150. alter or [9] restrict the provisions of the law they administer. this petition raising the sole issue of whether the 20% sales discount granted by respondent to qualified senior citizens pursuant to Sec. not a deduction from the gross sales of the establishment concerned. but rather from the private establishments concerned.‖ Finally. 229 of the Tax Code wherein the remedy of refund is available to the taxpayer. Sec. the 20% discount required by the Act to be given to senior citizens is a tax credit. The tax credit that is contemplated under the Act is a form of just compensation. No costs.WHEREFORE. SP No. In the same vein. In fact. No. Where there is no tax liability or where a private establishment reports a net loss for the period. . 4(a) of R. not deductions from income. dated May 31. The Decision of the Court of Appeals in CA-G. The administrative agencies issuing these regulations may not enlarge. when the law says that the cost of the discount may be claimed as a tax credit.193.‖ Nothing in the provision suggests for it to mean a ―deduction‖ from gross sales.00. prior payment of any tax liability is not a precondition before a taxable entity can benefit from the tax credit. 4 of the law speaks only of a tax credit. SO ORDERED. SO ORDERED. 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. That private establishments may claim the cost as tax credit. As earlier mentioned.A. [4] Accordingly. 60057. It must also be stressed that unlike in Sec. The credit may be availed of upon payment of the tax due. To construe it otherwise would be a departure from the clear mandate of the law.A. WHEREFORE. the definition of ‗tax credit‘ found in Section 2(1) of Revenue Regulations No. As a corollary to this. No. not a refund. No pronouncement as to costs. The law cannot be amended by a mere regulation. Privileges for the Senior citizens. 4. The CA and the CTA correctly ruled that based on the plain wording of the law discounts given under R.A.A. [11] Hence. 7432 should be treated as tax credits. 4(a) of R. 2-94. Its literal meaning should be followed. The privilege enjoyed by the senior citizens does not come directly from [12] the State. 2(1) of Revenue Regulations No. Sec. 4 of R. 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. 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. Thus. not a remedy for taxes that were erroneously or illegally assessed and collected. The above provision explicitly employed the word ―tax credit. the petition is DENIED. The statute in such a case must be [5] [6] taken to mean exactly what it says. to [7] depart from the meaning expressed by the words is to alter the statute. 7432 provides: Sec. No. 7432 may be claimed as a tax credit or as a deduction from gross sales in accordance with Sec.‖ This definition is contrary to what our lawmakers had envisioned with regard to the treatment of the discount granted to senior citizens. Sec. 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 percenta ge tax purposes.

Elmas Drug Corporation. The Commissioner of Internal Revenue. CORONA. and.R.) No. Grant Benefits and Special Privileges and for Other Purposes. Petitioner computed the overpayment as follows: COMMISSIONER OF INTERNAL REVENUE.750 On December 29. petitioner granted to qualified senior citizens a 20% sales discount on their purchase of medicines covering the period from July 19. No. 2-94 or as a tax credit deductible from the tax due.000 x 65% P334.R SP No. entitled ―An Act to Maximize t he Contribution of Senior Citizens to Nation Building. 1995.‖ and Revenue Regulations No. 2-94. otherwise known as ―An Act to Maximize the Contribution of Senior Citizens to Nation Building.330 and P515. 1995. 7432 instead of a deduction from gross income. Grant Benefits and Special Privileges and for Other Purposes. Promulgated: On March 28.‖ The controversy primarily involves the proper interpretation of the term ―cost‖ in Section 4 of Republic Act (R.‖ Pursuant to the provisions of R. 1994. JJ. No. 7432 regarding the treatment of the 20% sales discount given to senior citizens on their medicine purchases. dated October 19. 7432. 2006 x ---------------------------------------------------------------------------------------. amounting to P52. 142299 Present: - versus - PUNO. Income tax benefit of tax credit Income tax benefit of tax deduction Differential For 1993 20% discount granted in 1993 Multiply by 65% Overpaid corporate income tax For 1994 20% discount granted in 1993 Multiply by 65% Overpaid corporate income tax 100% 35% 65% June 22. No. Petitioner has a drugstore located in Naga City under the name and business style of ―Mercury Drug.‖ also known as the ―Senior Citizens Act. J. maintained that the aforesaid section 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. therefore. AZCUNA. 7432. and GARCIA.. petitioner filed a claim for refund or credit of overpaid income tax for 1993 and 1994. The Commissioner further stated that in statutory construction.BICOLANDIA DRUG CORPORATION (FORMERLY ELMAS DRUG COPRORATION). It contended that Section 4 of R.A.A. petitioner filed a Petition for Review with the Court of Tax Appeals (CTA) in order to toll the running of the two-year prescriptive period for claiming for a tax refund under Section 230. J. respectively.215 DECISION AZCUNA. No. of the case are as follows: Petitioner Bicolandia Drug Corporation is a domestic corporation principally engaged in the retail of pharmaceutical products. No. When petitioner filed its corresponding corporate annual income tax returns for taxable years 1993 and 1994. No. 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. 7432 provides in clear and unequivocal language that discounts granted to senior citizens may be claimed as a tax credit. Revenue Regulations No. Thus.330 x 65% P52. . 49946 entitled ―Commissioner of Internal Revenue v. is null and void for being inconsistent with the very statute it seeks to implement. 1993 to December 31. 2-94. seeking the nullification of the Decision and Resolution of the Court of Appeals.x P80. thus. SANDOVAL-GUTIERREZ.: This is a petition for review by Bicolandia Drug Corporation. G. Chairperson. in CA-G.215 and P334. The Commissioner likewise pointed out that the provision in question employs the word ―may.A.‖ The facts [2] [1] P515. it claimed as a deduction from its gross income the respective amounts of P80. respectively. of the Tax Code. now Section 229. on the other hand.A. which is merely an implementing regulation cannot modify.000 representing the 20% sales discount it granted to senior citizens. 1999 and February 18. 7432.A. alter or depart from the clear mandate of Section 4 of R. however. 2000.A. the 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. formerly known as Elmas Drug Corporation. alleging error in the computation and claiming that the aforementioned 20% sales discount should have been treated as a tax credit pursuant to R. Petitioner.‖ 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 avail of the tax credit scheme if he so chooses. addressing the matter of the proper construction of Section 4(a) of R. Respondent.750.

03 AMOUNT REFUNDABLE P 45.884. In view of such apparent discrepancy in the interpretation of the term ―tax credit‖. 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 the years 1993 and 1994 based on the evidence at hand.947.880. The overpaid income tax therefore is [3] computed as follows: For 1993 Net Sales Add: Citizens Gross Sales 20% Discount 80.00 Gross Income Less: Expenses Net Operating Income Add: Income Net Income Less: Interest Tax Net Taxable Income Income 21.117.036.‖ interpreting it to mean that the 20% discount granted to qualified senior citizens is an amount deductible from the establishment‘s gross sales. Contrary to the findings of the independent CPA.63 For 1994 Net Sales P 29.00 Tax Due (P920.00 Total Goods available for Sales P 33.00 Operating 1. the provisions of the law under R.00 Less: Cost of Sales Merchandise Inventory.194.344.00 P 942.835.330.03 2) Income Tax Payment for the Year 294.226.460.00 Less: Cost of Sales Merchandise Inventory.00 Income 30. 2-94 gave a new meaning to the phrase ―tax credit.A.207. which is completely contradictory to the literal or widely accepted meaning of the said phrase.234.00 P 367.575.00 P 869.024. dated August 27.240.00 Gross Sales P 30.080.00 P 2.508.930.00 Operating 1.153.585.160.00 Subject to Final P 920.00 Add: 20% Discount to Senior Citizens 515.330.138.160.884. 7432 should prevail over the subordinate regulation issued by the respondent under Revenue Regulation No. beg.00/31.875.680.838.00 to Senior P31.00 82. R-3).309. the Court. as an amount subtracted from an individual‘s or entity‘s tax liability to arrive at the total tax liability (Black‘s Law Dictionary).00 P 2. Not all the details listed in the 1994 ―Summary of Sales and Discounts Given to Senior Citizens‖ correspond with the cash slips presented.014.588.491.000.70 (Exh.00 Subject to Final P 613.875. P 4.00 Add Purchases 28.34] P 73.In its Decision.734.977.00) x 80.706.00 Miscellaneous 72. x xx After a careful scrutiny of the documents presented.00 .734.838.003.618. aside from the unverifiable 20% sales discounts in the amount of P18.690. End 5. allows only the amount of sales discounts duly supported by the pre-marked cash slips x xx.00 P28.00 Add Purchases 29.904. beg.40 Less: 1) Tax Credit (Cost of 20% Discount) [(28.804.361.441. 2-94. x xx Having settled the legal issue involved in the case at bar.884 x 35%) P 322.858.00 Less: Merchandise Inventory.00 27.00 P 561.00 Total Goods available for Sale P33. only the above amounts which are properly documented can be used as base in computing for the cost of 20% discount as tax credit. P 4.00 Gross Income Less: Expenses Net Operating Income Add: Miscellaneous Income Net Income Less: Interest Tax Net Taxable Income P31.047. the Court noted some material discrepancies.003.00 Less: Merchandise Inventory.585.00 P 643.574.103. Hence.140.944. There are various sales discounts granted which were not properly computed and there were also some cash slips left unsigned by the buyers. 1998.653. the CTA declared that: ―x xx Revenue Regulations No.419. End P 4.944.651.

the dispositive portion of which reads: WHEREFORE. hotels and similar lodging establishments. – 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. 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. The Court of Appeals rendered its assailed Decision on October 19. No. thus: ACCORDINGLY.634. and may be deducted from the tax liability of the entity concerned.63 and P135. Respondent is hereby ORDERED to REFUND. in view of all the foregoing.540. is treated as a return of tax payments erroneously or excessively SO ORDERED. Respondent is hereby ORDERED to ISSUE tax credit certificates in favor of petitioner [in] the amounts ofP45. restaurants and recreation centers and purchase of medicines anywhere in the country: Provided.906. respectively. the petition is hereby GRANTED IN PART.574. [6] Hence. 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.48 representing overpaid income tax for the years 1993 and 1994.00 Less: 1) Tax Credit (Cost of 20% Discount) [(28. the Commissioner filed a petition for review with the Court of Appeals asking for the reversal of the CTA Decision and Resolution. for the taxable years 1993 and 1994 as a result of treating the sales discount of 20% as a tax deduction rather than as a tax credit. the petitioner‘s Motion for Partial Reconsideration is hereby GRANTED.00) x 80.906. 7432 should be construed to mean the full amount of the 20% sales discount granted to senior citizens instead of the formula --[Tax Credit = Cost of Sales/Gross Sales x 20% discount] – used by the CTA in computing for the amount of the tax credit.A. SO ORDERED. as prayed for in its motion.330. in view of the foregoing premises. Such discount cannot be considered a tax credit because the latter. 7432 which states: Sec. being in the nature of a tax refund.Tax Due (613. Otherwise stated.A. the CTA modified its earlier decision.34] P316. petitioner‘s claim for refund is hereby partially GRANTED. dated December 7.160. to wit: (3) x xx 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 the tax or penalty. The resolution issued by the Court of Tax Appeals dated December [7].48 WHEREFORE. claimed that the ―cost‖ that private establishments may claim as tax credit under Section 4 of R. SO ORDERED.906.384. If there is no current tax due or the establishment reports a net loss for the period. 1999. respectively.48.48 AMOUNT REFUNDABLE P 135. THE ACQUISITION COST RATHER THAN THE ACTUAL DISCOUNT GRANTED TO SENIOR [7] CITIZENS SHOULD BE THE BASIS. to ISSUE a tax credit certificate in favor of the petitioner the amounts of P45. this petition positing that: 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. moved for a re-computation of petitioner‘s tax liability averring that the sales discount of 20% should be deducted from gross income to arrive at the taxable income.240 x 35%) P 214. in its Motion for Partial Reconsideration.574. on the other hand. petitioner prayed for the refund of the amount of income tax it allegedly overpaid in the aggregate amount of P45. No costs.906.48. or in the alternative. 1998 is SET ASIDE and the Decision rendered by the latter is AFFIRMED IN TOTO. the Respondent‘s Motion for Reconsideration is DENIED for lack of merit.63 and P135.Privileges for the Senior citizens. representing overpaid income tax for the years 1993 and 1994.63 and P135.838. 4.585. No.00 P 350. This amount shall be applied as a tax credit.574.003. Both the Commissioner and petitioner moved for a reconsideration of the above decision. In its Resolution.00/31.156. the credit may be carried over to the succeeding taxable year. That [8] private establishments may claim the cost as tax credit.48 2) Income Tax Payment for the Year 34. [4] On the other hand. This is in line with the interpretation of this Court . [5] Consequently. The Commissioner. assessed and collected as provided under Section 204(3) of the Tax Code. 1998. Petitioner. In view of this.

7432 allows private establishments to claim as tax credit the amount of discounts they grant to senior citizens.906. The Court notes that petitioner. No.63 and P135. Thus. asks for the refund of the [10] same. respectively. [9] .574. petitioner‘s claim for refund must be denied. while praying for the reinstatement of the CTA Resolution. dated December 7. 1998. 1998. dated October 19.A. 1999 and February 18. 2000. In this regard.48 representing overpaid income tax for 1993 and 1994. No costs.906. directing the issuance of tax credit certificates in favor of petitioner in the amounts of P45.in Commissioner of Internal Revenue v.48 is hereby REINSTATED. SO ORDERED. The law expressly provides that the discount given to senior citizens may be claimed as a tax credit. and not a refund. it must be given its literal meaning and applied without attempted [11] interpretation. Central Luzon Drug Corporation wherein it affirmed that R. WHEREFORE. dated December 7. in CA-G. the petition is PARTLY GRANTED. directing the issuance of tax certificates in favor of petitioner for the respective amounts of P45.R SP No.63 and P135. where the words of a statute are clear. 49946 are REVERSED and SET ASIDE.574. The Decision and Resolution of the Court of Appeals. plain and free from ambiguity. The Resolution of the Court of Tax Appeals.

140. Therefore. [9] protest.. In his Answer...00. operations ofP2.. the BIR issued RR 2-94 and defined the term ―tax credit‖ as a deduction from the establishment's gross income and not from its tax liability in order to avoid an [12] absurdity that is not intended by the law. [8] Respondent filed its 1997 Income Tax Return under .805..508.. Petitioner... respondent filed a Petition for Review with the CTA in order to toll the running of the two-year statutory period within which to file a judicial claim..829. Respondent reasoned that RR 2-94. between the Summary Report presented by respondent and the audited amount presented by the independent CPA. and LEONARDO-DE CASTRO...805.. CORONA. respondent filed its 1997 Corporate Annual Income Tax Return reflecting a nil income tax liability due to net loss incurred from business On 15 April 2002.376. the CTA rendered a Decision ordering petitioner to issue a tax credit certificate in the amount of P2.. Respondent.376. An administrative regulation must not contravene but should conform to the standards [14] that the law prescribes.‖ Pursuant to the provisions of RA 7432 and Revenue Regulations No.798. Promulgated: June 12. On 15 April 1998.. JJ. in favor of Central Luzon Drug Corporation (respondent). it was silent as to the mechanics of availing the same. there were some material discrepancies due to missing cash slips. 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..405. The sales discount granted to senior citizens totaled P2. For clarification.versus - 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 [10] of P2.. The re-computation of the overpaid income tax follows: [15] for the year 1997 is as ... failure to include the cash slips in the summary report and vice versa... AZCUNA.63. CARPIO. lack of senior citizen‘s ID number.. based on the examination conducted by the commissioned independent certified public accountant (CPA).00... When RA 7432 allowed senior citizens‘ discounts to be claimed as tax credit.. Respondent alleged that the overpaid tax was the result of the wrongful implementation of RA 7432. it operated eight drugstores under the [6] business name and style ―Mercury Drug.... it has consistently ruled that the 20% senior citizens‘ discount should be treated as tax credit instead of a [13] mere deduction from gross income.. The Court of Appeals dismissed the appeal filed by the Commissioner of Internal Revenue (petitioner) questioning the 15 [3] April 2002 Decision of the Court of Tax Appeals (CTA) in CTA Case No. alter or amend the clear mandate of RA 7432.. In 1997.... The CTA stated that in a number of analogous cases. The CTA also ruled that respondent has properly substantiated its claim for tax credit by documentary evidence.. The Facts Respondent is a domestic corporation engaged in the retail of medicines and [5] other pharmaceutical products. 6054 ordering petitioner to issue.00. Consequently. The Ruling of the Court of Tax Appeals CENTRAL LUZON DRUG CORPORATION. Chairperson. respondent granted 20% sales discount to qualified senior citizens on their purchases of medicines covering the calendar year 1997.. 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 intendment of the law... the CTA deemed it proper to consider the lesser of two amounts.. G... Respondent treated the 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. Section 2(i) of RR 2-94 is without force and effect for being [11] inconsistent with the law it seeks to implement... On 6 April 2000. arising from the alleged erroneous interpretation of the term ―tax credit‖ used in Section 4(a) of Republic Act [4] No.-x DECISION CARPIO. No. 70480.COMMISSIONER OF INTERNAL REVENUE. 2008 x.. However.J. (RA) 7432. In quoting its previous decisions...63 in favor of respondent.R. a tax credit certificate in the amount of P2.660. (RR) 2[7] 94 issued by the Bureau of Internal Revenue (BIR)... C.R...: The Case [1] [2] This petition for review on certiorari assails the 13 August 2003 Decision of the Court of Appeals in CA-G. cannot modify.. 159610 Present: PUNO. which is a mere implementing administrative regulation. J.. SP No.

RA 7432 does not require prior tax payment as a condition for claiming the cost of the sales discount as tax credit. this petition. tax liability.508.63) 2. Hence. if the statute is clear.805. 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.63) 0.115.540. However. Congress granted the tax credit benefit to all covered establishments without conditions.00 2. The Court of Appeals disagreed with petitioner‘s contention that the CTA's decision applied a literal interpretation of the law.762. 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.00 249.124.541. 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. The net loss incurred in a taxable year does not preclude the grant of tax credit because by its nature.00 2.00 ( 27.805.798.439. it must be given its literal meaning and applied without interpretation.913.00 16.154. ―A credit differs The issues presented are not novel. 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. the senior citizens‘ discount granted as a tax credit cannot be refunded.239.742. plain.‖ 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 [20] as enunciated in Section 229 of the Tax Code.281. Net Add: 20% Sales Discount to Senior Citizens Sales. This principle rests on the presumption that the words used by the legislature in a statute correctly express its [18] intent and preclude the court from construing it differently.00 P 393.00 P 20. The petition lacks merit.00 P179.679. end Gross Profit Add: Miscellaneous income Total Income Less: Operating expenses Net Income Less: Income subjected to final tax (Interest Income Net Taxable Income [16] P176.376.556. . Further.115.Sales. the Court of Appeals affirmed the CTA‘s decision in toto. and free from ambiguity. In two similar cases involving the same parties where respondent lodged its claim for tax credit on the senior citizens‘ [22] [23] discount granted in 1995 and 1996.484. the tax credit may still be deducted from a future. Under RA 7432.376.607. petitioner elevated the case before the Court of Appeals.00 P 17.00 P 17.172. (P 2.368.950. 162.00 402. and Whether the appellate court erred in holding that respondent is entitled to a refund.00 168. Purchases Merchandise inventory.63 1.00 ) The Issues [21] Petitioner raises two issues in this Petition: Income Tax Due (35%) Less: Tax Credit (Cost of 20% discount as adjusted Income Tax Payable Income Tax Actually Paid Income Tax Refundable [17] P ) 137. RA 7432 expressly allows private establishments to claim the amount of discounts they grant to senior citizens as tax credit.000. It reasoned that under the verba legis rule.00 P 642.489.514.387. beg.00) from deduction in that the former is subtracted from tax while the latter is subtracted [19] from income before the tax is computed. Gross Less: Cost of Sales Merchandise inventory. not a present. The Ruling of the Appellate Court The Ruling of the Court On 13 August 2003.905.699.00 (P 2. Aggrieved by the CTA‘s decision.

‖ Hence. (Emphasis supplied) In Commissioner of Internal Revenue v. restaurants. petitioner alleged that respondent incurred a net loss from its business operations in 1997.63 as tax credit despite incurring net loss from business operations for the taxable year 1997. To deny the tax credit. 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 affords merely a fractional reduction in the taxes payable to the government depending on the applicable tax rate. the Court declared. plain. Central Luzon Drug Corporation . Central Luzon Drug Corporation .‖ It is irrefutable that under RA 7432. Congress has granted the tax credit benefit to all covered establishments without conditions.805. it must be given its literal meaning and applied without any interpretation. Central Luzon Drug Corporation. (Emphasis supplied). . The senior citizens’ discount may be claimed as a tax credit and not a refund. the Court stressed that prior payment of tax liability is not a pre-condition before a taxable entity can avail of the tax credit. Hence. hotels and similar lodging establishments. it cannot engraft additional requirements not contemplated by the legislature. On the other hand. RA 9257 now specifically provides that all covered establishments may claim the senior citizens’ discount as tax deduction.DEFINITIONS.376. neither a tax liability nor a prior tax payment is required [28] for the existence or grant of a tax credit. leisure and amusement. and free of ambiguity. ―Where there is no tax liability or where a private establishment reports a net loss for the period. can be encashed. The applicable law on this point is clear [29] and without any qualifications. Since no tax payment was made. RR 2-94 interpreted the tax credit provision of RA 7432 in this wise: Sec. drugstores. 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. Chapter VII of the National Internal Revenue Code. That private establishments may claim the cost as tax credit. . xxx Sec. Section 4(a) of RA 7432 expressly provides that private establishments may claim the cost as a tax credit. .For purposes of these regulations: xxx i. the tax credit can be [27] availed of and carried over to the next taxable year. plain and simple. the definition provided in Section 2(i) of RR 2-94 cannot be given effect. it follows that no tax credit can also be claimed [25] because tax credits are usually applied against a tax liability. The tax credit may still be deducted from a future. concert halls. Hence. it did not pay any income tax. Therefore. restaurants and recreation centers andpurchase of medicines anywhere in the country: Provided. respondent is entitled to claim the amount of P2. If the words of the law are clear. alter or restrict the provisions of the law it administers. [26] Tax credit is defined as a peso-for-peso reduction from a taxpayer‘s tax liability. not a present. ―When the law says that the cost of the discount may be claimed as a tax credit. is indefensible. A tax credit can only be utilized as payment for future internal revenue tax liabilities of the taxpayer while a tax refund. recreation centers. despite the plain mandate of the law. Privileges for the Senior Citizens. 4. In Commissioner of Internal Revenue v. 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. 2. carnivals and other similar places of culture. tax liability. there being a dichotomy in the law and the revenue regulation. (Emphasis supplied) However.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. it means that the amount— when claimed ― shall be treated as a reduction from any tax liability. The Court declared. cinema houses. theaters. issued as a check or a warrant. 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. In Commissioner of Internal Revenue v. hence. the senior citizens‘ [30] discount may be claimed as a tax credit and not as a refund. the Court ruled that petitioner‘s definition in RR 2 -94 of a tax credit is clearly erroneous.‖ The Court further stated that the law cannot be amended by a mere regulation because ―administrative agencies in issuing these regulations may not enlarge. [24] In the petition filed before this Court. RR 2-94 treats the senior citizens‘ discount in the same manner as the allowable deductions provided in Section 34. hotels and similar lodging establishments. It is a direct subtraction from the tax payable to the government. 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.Section 4(a) of RA 7432 states: SECTION 4. circuses.

With the effectivity of RA 9257 on 21 March 2004. We AFFIRM the assailed Decision of the Court of Appeals dated 13 August 2003 in CA-G. Section 4(a) of RA 9257 reads: ―Sec. 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. The present case. That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. there is now a new tax treatment for senior citizens‘ discount granted by all covered establishments. RA 9257 has amended RA 7432. RA 7432. xxx The establishment may claim the discounts granted under (a). we DENY the petition. Provided. 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. further. No pronouncement as to costs. SP No. Privileges for the Senior Citizens.On 26 February 2004. 4. 70480. however. restaurants and recreation centers.R. RA 9257. otherwise known as the ―Expanded Senior [31] Citizens Act of 2003. .‖ was signed into law and became effective on 21 March 2004.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. including funeral and burial services for the death of senior citizens. (g) and (h) as tax deduction based on the net cost of the goods sold or services rendered: Provided. This discount should be considered as a deductible expense from gross income and no [32] longer as tax credit. . SO ORDERED. (f). covers the taxable year 1997 and is thus governed by the old law. and purchase of medicines in all establishments for the exclusive use or enjoyment of senior citizens. That the total amount of the claimed tax deduction net of value added tax if applicable. RA 9257 now specifically provides that this discount should be treated as tax deduction. WHEREFORE.

A. Rule VI. on the other hand. (f).: This is a petition for Prohibition with Prayer for Preliminary Injunction assailing the constitutionality of Section 4(a) of Republic Act (R.” ELSIE M.versus - G. and prosecute and revoke the licenses of erring drugstore establishments. No.] and Sections 10 and [8] 11 – Air. finally. ** SANDOVAL-GUTIERREZ. and NACHURA. as amended. 9257. AZCUNA. . – The establishment may claim the discounts granted under Rule V. 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 [4] Revenue Code. DEPARTMENT OF FINANCE (DOF). * QUISUMBING..J. 166494 Present: PUNO. as amended. 2007 OF JUSTICE (DOJ). Provided. 2004. doing business under the name and style “Leyte Serv-Well Drugstore. 2004. SIMPLICIO L. DEPARTMENT June 29.R.” MELVIN S. the DSWD approved and adopted the Implementing Rules and Regulations of R. the DOF. No. and purchase of medicines in all establishments for the exclusive use or enjoyment of senior citizens. and the Department of Interior and Local Government (DILG) which have been specifically tasked to monitor the drugstores‘ compliance with the law. DEPARTMENT OF Promulgated: HEALTH (DOH). AUSTRIA-MARTINEZ. x ---------------------------------------------------------------------------------------. That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. include the Department of Social Welfare and Development (DSWD). Section 9. promulgate the implementing rules and regulations for the effective implementation of the law. through Director IV Ma. doing business under the name and style “Carlos Superdrug. clarified as follows: AZCUNA. the Department of Finance (DOF). J. Respondents. CANO.. doing business under the name and style ―Advance Drug. YAP. CARPIO.‖ Petitioners are domestic corporations and proprietors operating drugstores in the Philippines.x DECISION On May 28. 7432. GARCIA. that the implementation of the tax deduction shall be subject to the Revenue Regulations to be issued by the Bureau of Internal Revenue (BIR) and approved by the Department of Finance [9] (DOF). [3] DEPARTMENT OF SOCIAL WELFARE and DEVELOPMENT (DSWD). No. No. CARPIO MORALES. and DEPARTMENT OF INTERIOR and LOCAL GOVERNMENT (DILG). CHICO-NAZARIO. Public respondents. [5] Section 4 – Discounts for Establishments... in reference to the query of the Drug Stores Association of the Philippines (DSAP) concerning the meaning of a tax deduction under the Expanded Senior Citizens Act. The establishment may claim the discounts granted under (a).CARLOS SUPERDRUG CORP. 4. Article 8 of which states: Article 8. VELASCO. Tax Deduction of Establishments. On February 26. JR. Section 4(a) of the Act states: SEC. JR.A. . was signed into law by President Gloria Macapagal-Arroyo and it became effective on March 21. C. Provided. JJ. CORONA.A. further. R. Provided. Lourdes B. 2004. That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. 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. The antecedents are as follows: [1] . doing business under the name and style “City Pharmacy.A.. restaurants and recreation centers. Provided... further. Recente. amending R. DELA SERNA.” Petitioners. Sea and Land Transportation as tax deduction based on the net cost of the goods sold or services rendered. 2004. YNARES-SANTIAGO. That the total amount of the claimed tax deduction net of value added tax if applicable. – 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. TINGA. 9257.” Dr. otherwise known as the ―Expanded Senior Citizens Act of 2003. Privileges for the Senior Citizens. including funeral and burial services for the death of senior citizens. That the total amount of the claimed tax deduction net of value added tax if applicable. the Department of Justice (DOJ). doing business under the name and style “Boticadela Serna. [2] 9257. (g) and (h) as tax deduction based on the net cost of the goods sold or services rendered: Provided. On July 10.” and LEYTE SERV-WELL CORP.) No. Medical and [6] [7] Dental Services in Private Facilities[. the Department of Health (DOH).

the tax deduction on discounts was subtracted from Net Sales together with other deductions which are considered as operating expenses before the Tax Due was computed based on the Net Taxable Income. operators of domestic air and sea transport services. restaurants and recreation centers and purchase of medicines anywhere in the country. (f). under a tax credit scheme. Aside from the establishments that may claim tax credits under the old law. hotels and similar lodging establishment. the costs of which may be claimed by the private establishments concerned as tax credit. a tax credit is a peso-for-peso deduction from a taxpayer‘s tax liability due to the government of the amount of discounts such establishment has granted to a senior citizen. based on the net cost of goods sold or services rendered.1. however. On the other hand. been broadened. This will be an amount equivalent to 32% of the twenty percent (20%) discounts so granted. The establishment shoulders the remaining portion of the granted discounts. It must be noted. the amount of discounts which is the tax credit item. the establishment concerned is allowed to deduct from gross income.A. 1. necessitates that prior payments of taxes have been made and the taxpayer is attempting to recover this tax payment from his/her income tax due. otherwise known as the “Expanded Senior Citizens Act of 2003” was issued by the DOH. including professional fees of attending doctors in all private hospitals and medical facilities. Effectively. the government loses in terms of foregone revenues an amount equivalent to the marginal tax rate the said establishment is liable to pay the government. 1. The tax credit scheme under R. .O. 7432 (the old Senior Citizens Act) grants twenty percent (20%) discount from all establishments relative to the utilization of transportation services. public railways and skyways and bus transport services. therefore. 171 or the Policies and Guidelines to Implement the Relevant Provisions of Republic Act [11] 9257. a tax credit scheme under the Philippine tax system. 9257. 2004. providing the grant of twenty percent (20%) discount in the purchase of unbranded generic medicines from all establishments dispensing medicines for the exclusive use of the senior citizens. on the other hand. in computing for its tax liability. Administrative Order (A. 7432 is. Under this scheme. Meanwhile. The establishment recovers the full amount of discount given to a senior citizen and hence. more establishments were added under the new law such as: establishments providing medical and dental services. the government shoulders 100% of the discounts granted. The provision of Section 4 of R. The provision under R. the number of potential establishments that may claim tax deductions. that conceptually. the amount of discounts granted to senior citizens. provides that the establishment concerned may claim the discounts under Section 4(a). (g) and (h) as tax deduction from gross income.A. No.A.2.1) The difference between the Tax Credit (under the Old Senior Citizens Act) and Tax Deduction (under the Expanded Senior Citizens Act). on October 1. as follows: Tax Deduction Credit Tax Gross Sales xxxxx xxxxxx Less : Cost of goods sold xxxx xxxxx Net Sales xxxx x xxxxxx Less: Operating Expenses: Tax Deduction on Discounts xxx -Other deductions: xxx xxxx Net Taxable Income xxxx xxxxx Tax Due x x xxx Less: Tax Credit ______x x Net Tax Due xx x x x x x x x --- As shown above. inapplicable since no tax payments have previously occurred. was deducted directly [10] from the tax due amount. diagnostic and laboratory services. A simple illustration might help amplify the points discussed above. have however.) No. under a tax deduction scheme. Effectively. No. No. It may be necessary to note that while the burden on [the] government is slightly diminished in terms of its percentage share on the discounts granted to senior citizens.

Examining petitioners‘ arguments. the Act provides: SEC. Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines. Section 4 of the Constitution. In addition to this. (f) To recognize the important role of the private sector in the improvement of the welfare of senior citizens and [21] to actively seek their partnership.. health and other social services [14] available to all people at affordable cost. 177.O. Sec. and to grant benefits and privileges to them for their improvement and well-being as the State considers them an integral part of our [20] society. substantial.O. The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nation-building. There shall be priority for the needs of the underprivileged sick. women and children. III. it is the duty of the family to take care of its elderly members while the State may design programs of social security for them. No. it is an amount that is allowed by law to reduce the income prior to the [16] application of the tax rate to compute the amount of tax which is due. Being a tax deduction.‖ Consonant with these constitutional principles the following are the declared policies of this Act: . The measure is not the taker‘s gain but the owner‘s loss. Stated [15] otherwise. were it not for R. Declaration of Policies and Objectives. it stated that ―[t]he grant of twenty percent (20%) discount shall be provided in the purchase of medicines from all establishments dispensing medicines for the exclusive use of the senior citizens. provides: ―The State shall adopt an integrated and comprehensive approach to health development which shall endeavor to make essential goods.. disabled. 9257. Republic Act No. elderly. Thus. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments. 2. 2004. the treatment of the discount as a deduction reduces the net income of the private establishments concerned. 1) enshrined in our Constitution which states that ―no person shall be deprived of life. this raises the question of whether the State. Section 11.A. . liberty or property without due process of law. – Pursuant to Article XV. Based on the afore-stated DOF Opinion. and 2) the law failed to provide a scheme whereby drugstores will be justly compensated for the discount. 2) 3) Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property. the discount does not reduce taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed. Section 10 in the Declaration of Principles and State Policies provides: ―The State shall provide social justice in all phases of national development. It violates the equal protection clause (Art.On November 12. 7432 is hereby amended to read as follows: SECTION 1. 9 of the Constitution which provides that private property shall not be taken for public use without just compensation. 171. and to convey the idea that the equivalent to be rendered for [18] the property to be taken shall be real. The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself. nor shall any person be denied of the equal protection of the laws. the tax deduction scheme does not fully reimburse petitioners for the discount privilege accorded to senior citizens. Sec. A tax deduction does not offer full reimbursement of the senior citizen [19] discount. As such.‖ The permanent reduction in their total revenues is a forced subsidy [17] corresponding to the taking of private property for public use or benefit. III. in promoting the health and welfare of a special group of citizens. The Court believes so. Thus. This constitutes compensable taking for which petitioners would ordinarily become entitled to a just compensation. the twenty percent discount shall not be limited to the purchase of unbranded generic medicines only. it is apparent that what petitioners are ultimately questioning is the validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount that they extend to senior citizens. it would not meet the definition of just compensation. Having said that. No. full and ample. No. Under A. but shall extend to both prescription and non-prescription medicines whether branded or generic. The word just is used to intensify the meaning of the word compensation. Just compensation is defined as the full and fair equivalent of the property taken from its owner by the expropriator. Theoretically. Article XIII. Section 11 that makes ―essential goods.‖ Further. the DOH issued Administrative Order No [12] 177 amending A. health and other social services available to all the people at affordable cost.‖ and The 20% discount on medicines violates the constitutional guarantee in Article XIII. This is because the discount is treated as a deduction.‖ Petitioners assail the constitutionality of Section 4(a) of the Expanded Senior [13] Citizens Act based on the following grounds: 1) The law is confiscatory because it infringes Art. a tax-deductible expense that is subtracted from the gross income and results in a lower taxable income. can impose upon private establishments the burden of partly subsidizing a government program.

According to the latter.92. No costs. the law grants a twenty percent discount to senior citizens for medical and dental services.92. The law is a legitimate exercise of police power which.68 will be shouldered by them as only P0. only P2. Inasmuch as pricing is a property right. as they shall judge to be for the good and welfare of the commonwealth. the Court will refrain from quashing a legislative act. can intervene in the operations of a business which may result in an impairment of property rights in the process. and retails it at P39. and that the continued implementation of the same would be unconscionably [31] detrimental to petitioners. for every P1. carnivals. expenses.00 senior citizen discount that petitioners would give.68 which translates to a loss from capital of P5. and other similar places of culture. Furthermore. the amount of income derived from all sources before deducting allowable expenses. though sheltered by due process. 9257 is arbitrary. In treating the discount as a tax deduction. fares for domestic land. there is no basis for its nullification in view of the presumption of validity which every law has in [26] its favor. Absent any financial statement. various laws and jurisprudence. WHEREFORE. and net profit (or loss) for a given period could have accurately reflected the effect of the discount on their income. when the conditions so demand as determined by the legislature. As a form of reimbursement. the means employed in invoking the active participation of the private sector.57 per tablet. which will result in net income. which should not be the case. Lastly. P0. admission fees charged by theaters. showing an accounting of petitioners‘ sales. it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly oppressive to their business. similar to the power of eminent domain. petitioners tried to show a loss on a per transaction basis. referring to the DOF Opinion. is reasonably and directly related. utilization of services in hotels and similar lodging establishments. Here. In short. and ordinances. petitioner Carlos Super Drug cited the antihypertensive maintenance drug Norvasc as an example. statutes.53 per tablet will be refunded and not the full amount of the discount which is P7. Without sufficient proof that Section 4(a) of R. concert halls. Given these. it has been described as ―the most essential. air and sea travel. . To illustrate this point. the questioned provision is invalidated. petitioners must accept the realities of business and the State. Moreover. the 32% tax rate is to be imposed on income. has general welfare for its object. then it would have to sellNorvasc at P31.‖ For this reason. SO ORDERED. Police power is not capable of an exact definition. Moreover. and diagnostic and laboratory fees. the law provides that business establishments extending the twenty percent discount to senior citizens may claim the discount as a tax deduction. circuses. and purchases of medicines for the exclusive use or enjoyment of senior citizens. leisure and amusement. in order to achieve the purpose or objective of the law. Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of petitioners that they will suffer loss of earnings and capital. as alleged by petitioners. simply because they cannot afford to raise their prices for fear of losing their customers to competition. only 32% of the 20% discount will be reimbursed to [28] the drugstores. thus assuring the greatest [22] benefits. is merely a result of this decision. and establish all manner of wholesome and reasonable laws. No. The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of the business. insistent and [23] the least limitable of powers. Selling the medicines below acquisition cost.To implement the above policy. because petitioners have not taken time to calculate correctly and come up with a financial report. must yield to general welfare. While the Constitution protects property rights. it acquires Norvasc from the distributors at P37. property rights must bow to the primacy of police power because property [25] rights.89 per tablet. ordain.60 (or at a margin of 5%). petitioners cannot reproach the law for being oppressive. and of the subjects of the [24] same. particularly on agrarian reform and the regulation of contracts and public utilities. This being the case. Accordingly. If it grants a 20% discount to senior citizens or an amount equivalent to P7. In addition. not on the amount of the discount. continuously serve as a reminder that the right to property can be [30] relinquished upon the command of the State for the promotion of public good.‖ It is ―[t]he power vested in the legislature by the constitution to make. Even if the government will allow a tax deduction. For purposes of reimbursement. Undeniably. While Article XIII of the Constitution provides the precept for the protection of property.A. restaurants and recreation centers. so that they have not been able to show properly whether or not the tax deduction scheme really works [27] greatly to their disadvantage. extending as it does to all the great public needs. petitioners cannot substantiate their claim that they will be operating at a loss should they give the discount. It is a business decision on the part of petitioners to peg the mark-up at 5%. but has been purposely veiled in general terms to underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible response to conditions and circumstances. either with penalties or without. in the absence of evidence demonstrating the alleged confiscatory effect of the provision in question. the right to property has a social dimension. An income statement. not repugnant to the constitution. it is unfair for petitioners to criticize the law because they cannot raise the prices of their medicines given the cutthroat nature of the players in the industry. in the exercise of police power. petitioners insist that they will incur losses because. the success of the senior citizens program rests largely on the support imparted by petitioners and the other private establishments concerned. the petition is DISMISSED for lack of merit. the computation was erroneously based on the assumption that their customers consisted wholly of senior citizens.32 will be refunded by the government by way of a tax deduction. the law [29] states that the cost of the discount shall be deducted from gross income. Petitioners‘ computation is flawed.

79. through the Office of the Solicitor General. FAS-1-86-90-000680 for deficiency income tax in the amount of P333.R. and that ICC properly withheld and remitted taxes on the payments for security services for the taxable year 1986. even if some of these professional services were rendered to ICC in 1984 or 1985. hence. both for the taxable year 1986.196. On February 26. holding that although the professional services (legal and auditing services) were rendered to ICC in 1984 and 1985.897. it received a final notice before seizure demanding 3 payment of the amounts stated in the said notices. The deficiency expanded withholding tax of P4. and Assessment Notice No. ICC. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount of P4. The case was thus remanded to the CTA for further proceedings. 2007 COMMISSIONER OF INTERNAL REVENUE. No. 1985. the cost of the services was not yet determinable at that time. Likewise. 78426 affirming the February 2 26. amounts to a final decision on the protested assessment and may therefore be questioned before the CTA. The dispositive portion of the CTA‘s Decision. 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). 2005 1 Decision of the Court of Appeals in CA-G.86.86. On February 9.. Hence. Hence. despite the absence of a stipulation in the contract providing for a compounded interest.86. petitioner. ISABELA CULTURAL CORPORATION.: Petitioner Commissioner of Internal Revenue (CIR) assails the September 30.196. Inc. 2003 Decision of the Court of Tax Appeals (CTA) in CTA Case No. J.897. for the year 4 ending December 31. FAS-1-86-90000680 for deficiency income tax in the amount of P333. ICC sought a reconsideration of the subject assessments.79 (inclusive of interest and surcharge) was allegedly due to the failure of ICC to withhold 1% expanded 7 withholding tax on its claimed P244. reads: WHEREFORE.. it could be considered as deductible expenses only in 1986 when ICC received the billing statements for said services.79. The deficiency income tax of P333. in G.890. like delay in payment or breach of contract. No. SP No. 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. On March 23. 5211. in view of all the foregoing. 2003. The facts show that on February 23. a domestic corporation. vs. SO ORDERED.R.196. (2) The alleged understatement of ICC‘s interest income on the three promissory notes due from Realty Investment. filed the instant petition contending that since ICC is using the accrual method of accounting. arose from: (1) The BIR‘s disallowance of ICC‘s claimed expense deductions for professional and security services billed to and paid by ICC in 1986.00 deduction for security services. Inc. 172231 February 12. The CTA also held that ICC did not understate its interest income on the subject promissory notes. nor of a circumstance.. which affirmed the CTA 10 decision. the CTA rendered a decision canceling and setting aside the assessment notices issued against ICC. 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. it could not declare the same as deduction for the said years as the amount thereof could not be determined at that time. 9 Petitioner filed a petition for review with the Court of Appeals. This was reversed by the Court of Appeals holding that a demand letter of the BIR reiterating the payment of deficiency tax. the expenses .897. 2001. (c) Expense for security services of El Tigre Security & 6 Investigation Agency for the months of April and May 1986. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount of P4. 135210. Hence. Petitioner. that would justify the application of compounded interest.R. DECISION YNARES-SANTIAGO. inclusive of surcharges and interest. both for the taxable year 1986. received from the BIR Assessment Notice No. This conclusion was 8 sustained by this Court on July 1. and Assessment Notice No. inclusive of surcharges and interest. It further ruled that ICC did not understate its interest income from the promissory notes of Realty Investment. are hereby CANCELLED and SET ASIDE. Inc. 1990. 1990. Respondent. Assessment Notice No. 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. however. 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.G. to wit: (a) Expenses for the auditing services of SGV & Co. (b) Expenses for the legal services [inclusive of retainer fees] of the law firm BengzonZarragaNarcisoCudalaPecsonAzcuna&Bengson 5 for the years 1984 and 1985. 1995.

As to when the firm‘s performance of its services in connection with the 1984 tax problems were completed. Corollarily. This test requires: (1) fixing of a right to income or liability to pay. records or other 11 pertinent papers. For another. However. From the nature of the claimed deductions and the span of time during which the firm was retained. As testified by the Treasurer of ICC. within the taxable year. It simply relied on the defense of delayed billing by the firm and the company. without regard to indeterminacy 14 merely of time of payment. Accounting methods for tax purposes comprise a set of rules for determining when 12 and how to report income and deductions. where there is created an enforceable liability. Revenue Audit Memorandum Order No.for the professional services that accrued in 1984 and 1985. Similarly. or whether it does or does not possess the information necessary to compute the amount of said liability with reasonable accuracy. like expenses paid for legal and auditing services. it must be determined with "reasonable accuracy. dependent upon the m ethod of accounting upon the basis of which the net income is computed x xx". In the instant case. As previously stated. The requisites for the deductibility of ordinary and necessary trade. and (2) the availability of the reasonable accurate determination of such income or liability. 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. if its basis is unchangeable. Inc.[16] Accrual method of accounting presents largely a question of fact. 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. it is a governing principle in taxation that tax exemptions must be construed in strictissimijuris against the taxpayer and liberally in favor of the taxing authority. (b) it must have been paid or incurred during the taxable year. which . 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. a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct 13 the same for the next year. and (2) held that ICC did not understate its interest income from the promissory notes of Realty Investment. ICC failed to discharge this burden. especially so that it is using the accrual method of accounting. in the exercise of due diligence could have inquired into the amount of their obligation to the firm. which characterizes the cash method of accounting. 1-2000. As to the alleged deficiency interest income and failure to withhold expanded withholding tax assessment. only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The accrual method relies upon the taxpayer‘s right to receive amounts or its obligation to pay them. the accounting method used by ICC is the accrual method. The amount of liability does not have to be determined exactly. the test is satisfied where a computation may be unknown. the determinative question is. Amounts of income accrue where the right to receive them become fixed. but is not as much as unknowable. ICC. the test does not demand that the amount of income or liability be known absolutely. and one who claims an exemption must be able to justify the same by the clearest grant of organic or statute law. the term "reasonable accuracy" implies something less than an exact or completely accurate amount. And since a deduction for income tax purposes partakes of the nature of a tax exemption. (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer. then it must also be 18 strictly construed. the expenses for professional fees consist of expenses for legal and auditing services. In the instant case. The all-events test requires the right to income or liability be fixed. and for reimbursement of the expenses of said firm in connection with ICC‘s tax problems for the year 1984. liabilities are accrued when fixed and determinable in amount. are questions of fact which ICC never established." Accordingly. 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. An exemption from the common burden cannot be permitted to exist upon vague implications. in opposition to actual receipt or payment. 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‘. However. the firm has been its counsel since the 19 1960‘s. For one. The all-events test is satisfied where computation remains uncertain. are: (a) the expense must be ordinary and necessary. and that ICC withheld the required 1% withholding tax from the deductions for security services. The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the expenses for professional and security services from ICC‘s gross income. business. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm BengzonZarragaNarcisoCudalaPecsonAzcuna&Bengson. petitioner invoked the presumption that the assessment notices issued by the BIR are valid. and the amount of such income or liability be determined with reasonable accuracy. 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. at the closing of its books for the taxable year. or whether ICC exercised reasonable diligence to inquire about the amount of its liability. ICC can be expected to have reasonably known the retainer fees charged by the firm as well as the compensation for its legal services. Thus. or could reasonably be expected to have known. such that the taxpayer bears the burden of proof of establishing the accrual of an 17 item of income or deduction.[15] The propriety of an accrual must be judged by the facts that a taxpayer knew. 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. or professional expenses. and (d) it must be supported by receipts. For a taxpayer using the accrual method.

79 for deficiency expanded withholding tax. There is indeed no stipulation between the latter and ICC on the application of compounded 21 interest.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 BIR‘s disallowance of ICC‘s expenses for professional services. are concerned. in the year 1985. 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. Anent the purported understatement of interest income from the promissory notes of Realty Investment. the professional fees of SGV & Co. Assessment Notice No. Under Article 1959 of the Civil Code. The September 30. 1-2000. per Revenue Audit Memorandum Order No. Inc. In the same vein. interest due should not further earn interest.. 78426. they cannot be validly deducted from its gross income for the said year and were therefore properly disallowed by the BIR. and of the law firm. the records show that these expenses were 20 incurred by ICC in 1986 and could therefore be properly claimed as deductions for the said year. is not sufficient to exempt it from being charged with knowledge of the reasonable amount of the expenses for legal and auditing services. BengzonZarragaNarcisoCudalaPecsonAzcuna&Bengson. the petition is PARTIALLY GRANTED. This is so because ICC failed to present evidence showing that even with only "reasonable accuracy. Likewise. for auditing the financial statements of ICC for the year 1985 cannot be validly claimed as expense deductions in 1986. which disallowed the expense deduction of Isabela Cultural Corporation for professional and security services. it cannot determine the professional fees which said company would charge for its services. Hence.196. SP No." as the standard to ascertain its liability to SGV & Co. is declared valid only insofar as the expenses for the professional fees of SGV & Co. .under the circumstances. FAS-1-86-90-000680. the Assessment Notice for deficiency expanded withholding tax was properly cancelled and set aside. The Court of Appeal‘s cancellation of Assessment Notice No. FAS-1-86-90-000680. SO ORDERED. unless there is a stipulation to the contrary. 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 22 receipts. The case is remanded to the BIR for the computation of Isabela Cultural Corporation‘s liability under Assessment Notice No. 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 1986.897. FAS-1-86-90-000681 in the amount of P4. The decision is affirmed in all other respects. Hence. In sum. is sustained. 2005 Decision of the Court of Appeals in CA-G.R. WHEREFORE. FAS-1-86-90-000680 in the amount of P333. As to the expenses for security services. is AFFIRMED with the MODIFICATION that Assessment Notice No.

t. that he was also a stockholder and officer of the Paradise Farms. 11. 93. as a director. If the deficiency tax is not paid within thirty (30) days from the date this decision becomes final.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. a onetime P100. plus a salary bonus of about P40.n. The Court of Tax Appeals upon reviewing the assessment at the taxpayer's petition.00. Inc.s. with a capital stock of 1.n.n. petitioner.977. As found by the Tax Court. filed its income tax return for its fiscal year ending September 30.000. its fairness and deductibility by the taxpayer could be conceded. M. with their respective nominal shareholdings of one share each was also salesman-broker for his company. 1969 C. Mr. TEEHANKEE.s. respondent. by the terms of which petitioner was 'to program the development.977.6% of its total authorized capital stock while the four other officers-stockholders of the firm owned a total of four-tenths of 1%. from October 1. C. Petitioner is ordered to pay to the latter or his representative the sum of P27. respondent Commissioner of Internal Revenue. Hoskins owns 996 shares (the other 4 shares being held by the other four officers of the corporation). C. representing deficiency income tax for the year 1957. which constitute exactly 99. disallowed four items of deduction in petitioner's tax returns and assessed against it an income tax deficiency in the amount of P28. subdivision projects of Paradise Farms. preside over meetings and to get all of the real estate business I could for the company by negotiating sales. Petitioner questions in this appeal the Tax Court's findings that the disallowed payment to Hoskins was an inordinately large one. with the provision of water supply to all of the lots and in general to serve as managing agents for the Paradise Farms. t. 1959 to be computed in accordance with the provisions of Section 51(d) of the National Internal Revenue Code. holding 99. or one-tenth of 1% each.145. regardless of whether services were actually rendered by Hoskins. his duties were: "To act as a salesman. 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. No. C.).00 plus interests. going .540. There could be no question that as Chairman of the board and practically an absolutely controlling stockholder of petitioner. managing agents and administrators. that during the first four years of its existence. Upon verification of its return.750.6% of its stock. t. plan the proposed subdivision as outlined in the prospectus of Paradise Farms. If such payment of P99.00 each share.). receiving a 50% share of the sales commissions earned by petitioner.. As correctly observed by respondent. which bears his name.: 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. 96. bonus and supervision fee) a total of P184.00 and an annual salary bonus of P40.R. Inc.91 as his equal or 50% share of the 8% supervision fees received by petitioner as managing agents of the real estate.540.91. C. that as chairman of the Board of Directors.n.00 a year (p.750. the Tax Court correctly ruled that the payment by petitioner to Hoskins of the additional sum of P99. Hoskins was the President.00 amounting to an annual compensation of P45.977. Hoskins in 1937. plus free use of the company car and receipt of other similar allowances and benefits. We find no merit in petitioner's appeal. a domestic corporation engaged in the real estate business as brokers. from which petitioner derived a large portion of its income in the form of supervision fees and commissions earned on sales of lots (pp." (pp.) Considering that in addition to being Chairman of the board of directors of petitioner corporation.977. that as chairman of the Board of Directors of petitioner.G.n. Inc. Hoskins. but during the taxable period in question. t. arrange financing.00.977. Inc. "petitioner was founded by Mr.s. 1957 showing a net income of P92. 92. then Hoskins would receive on these three items alone (salary. attached to Exhibit '1'. premises considered.6% of the total authorized capital stock (p.000 shares at a par value of P1. COMMISSIONER OF INTERNAL REVENUE. making appraisals. that he was familiar with the contract entered into by the petitioner with the Paradise Farms. M.91 is not a deductible ordinary and necessary expense and should be treated as a distribution of earnings and profits of the taxpayer. Inc. p. that of these 1.91 were to be allowed as a deductible item. arrange contract for road constructions. HOSKINS & CO. he received a salary of P3. since "Hoskins had personally conceived and planned the project" cannot change the picture. t. the decision of the respondent is hereby modified. t.. 1957. besides his monthly salary of P3. since his services to petitioner included such planning and supervision and were already handsomely paid for by petitioner. The Tax Court therefore determined petitioner's tax deficiency to be in the amount of P27.. and subsequently for the Realty Investment.000. INC. Even just as board chairman.145. 1964 rendered judgment against it.00 a month.25. Inc. Hoskins. who owned 99.054.s.. and Realty Investments. 94. purchases. raising funds to finance real estate operations where that was necessary' (p.25 and a tax liability due thereon of P18. Inc. which would be double the petitioner's reported net income for the year of P92.91 representing 50% of supervision fees earned by it and set aside respondent's disallowance of three other minor items. as follows: WHEREFORE. The fact that such payment was authorized by a standing resolution of petitioner's board of directors.). without costs. M. vs. plus interest at 1/2% per month from June 20. M. which it paid in due course. and the Realty Investments. he was the chairman of the Board of Directors and salesman-broker for the company (p.000. its founder and controlling stockholder the amount of P99.00.). 96-97. 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.s. Mr. Inc. and Realty Investments. L-24059 November 28. 1956 to September 30.000. 97-99. If independently. J. that is. Hoskins wielded tremendous power and influence in the formulation and making of the company's policies and decisions.). M.00 and on November 8. Financial Statements. Inc.s.000 shares. petitioner is also ordered to pay surcharge and interest as provided for in Section 51 (e) of the Tax Code.. BIR rec. which bore a close relationship to the recipient's dominant stockholdings and therefore amounted in law to a distribution of its earnings and profits. Petitioner.n. upheld respondent's disallowance of the principal item of petitioner's having paid to Mr.508.

. 410). in accordance with its board resolution of June 18. and a collection fee of 5% of gross collections.44." Petitioner's case fails to pass the test. Concededly.50. "Lastly. and 'general economic conditions' (4 Mertens. its locality. and (3) the bonuses. 407-412). . 'the character of the taxpayer's business. do not exceed a reasonable compensation for the services rendered' (4 Mertens Law of Federal Income Taxation. This is evident from petitioner's board's resolution of July 14. are 'reasonable . he has no authority to fix the amounts to be paid to corporate officers by way of basic salary. The case before us is similar to previous cases of disallowances as deductible items of officers' extra fees. when the office commission covers general supervision. delegating powers to the president and advising the corporation in 1 determining executive salaries. wherein it is recited that in addition to petitioner's sales commission of 12% of gross sales. all that We need say is this: that right may be conceded. dividend policies. p. But this right of the corporation is. Sec. 1969. . Secs. when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer' (Idem. Schedule I — In the case of sales to prospects discovered and worked by a salesman. enunciated in the earlier 1967 case involving the same parties.by petitioner's own enumeration of the powers of the office. could exercise great power and influence within the corporation. Furthermore. 25. the decision appealed from is hereby affirmed. This depends upon many factors. of course. it should be noted that we have here a case practically of a sole proprietorship of C. 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. but a 50% share besides in petitioner's planning and supervision fee of 8% of the gross sales. who however chose to incorporate his business with himself holding virtually absolute control thereof with 99. or total fees of 25% of gross sales. bonus or additional remuneration — a matter that lies more or less exclusively within the sound discretion of the corporation itself. M.. one of them being 'the amount and quality of the services performed with relation to the business. which he presumably collected also from petitioner without respondent's questioning it. "There is no fixed test for determining the reasonableness of a given bonus as compensation. 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. 25. Hoskins. (2) it must be for personal services actually rendered. with costs in both instances against petitioner. Petitioner's Sales Regulations provide: Compensation of Salesmen 8. Having chosen to use the corporate form with its legal advantages of a separate corporate personality as distinguished from his individual personality. pp. 25.51. ACCORDINGLY. . upheld by this Court as not being within the purview of ordinary and necessary expenses and not passing the test of 3 reasonable compensation. what is involved here is not Hoskins' salesman's share in the petitioner's 12% sales commission. it is bound to pay the income tax imposed by law on corporations and may not legally be permitted. we reaffirmed the test of reasonableness. Inc. etc. but for income tax purposes the employer cannot legally claim such bonuses as deductible expenses unless they are shown to be reasonable. In most cases the 2 salesman's share is 4%. p. 25. Hoskins. and that ordinarily it is the interplay of several factors. i. 1946. (Exh. 1953 (Exhibit 7). Ordinarily. 395). . it is important to keep in mind that it seldom happens that the application of one test can give satisfactory answer. In the case of subdivisions. the subdivision owners were paying to petitioner 8% of gross sales as supervision fee. Sec. when added to the salaries. Petitioner's invoking of its policy since its incorporation of sharing equally sales commissions with its salesmen. is equally untenable. 'in determining whether the particular salary or compensation payment is reasonable. bonuses and commissions. we there held further that while the employer's right may be conceded. 25. It will be readily seen therefrom that when the petitioner's commission covers general supervision. 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 such right that it deemed proper to pay the bonuses in question. Specifically. Law of Federal Income Taxation.' Other tests suggested are: payment must be 'made in good faith'. the salesman's share being stipulated in the case of each subdivision. provided such payments. which must furnish the final answer. no single factor is decisive. 'the size of the particular business'. such as directing the policy of the corporation. properly weighted for the particular case. However. In Kuenzle&Streiff. but not exceeding five percent (5%). petitioner. Commissioner of Internal 4 Revenue decided by this Court on May 29. by way of corporate resolutions authorizing payment of inordinately large commissions and fees to its controlling stockholder.50. is bound to comport itself in accordance with corporate norms and comply with its corporate obligations. On the right of the employer as against respondent Commissioner to fix the compensation of its officers and employees. the corporation so created. "N-1"). To hold otherwise would open the gate of rampant tax evasion.6% of its stock with four other nominal shareholders holding one share each. . even though the closing is done by or with the help of the Sales Manager or other members of the staff. as mentioned above. the salesmen get one-half (1/2) of the total commission received by the Company. the situation must be considered as whole. vs. to dilute and diminish its corresponding corporate tax liability." Finally. . The conditions precedent to the deduction of bonuses to employees are: (1) the payment of the bonuses is in fact compensation. 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. the salary policy of the corporation'. 25. the 1/2-rule does not apply. the volume and amount of its net earnings. when added to the stipulated salaries.49. 44. not absolute. 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.e. 'the employees' qualifications and contributions to the business venture'. the type and extent of the services rendered. It cannot exercise it for the purpose of evading payment of taxes legitimately due to the State. bonus plans and pensions.

the municipal treasurer of Catanauan. Court of Tax Appeals. before the expiration of said five-year period.554. Gancayco sought a reconsideration. he says. March 30. Gancayco argues that the five-year period for the judicial action should be counted from May 12. 1956.793. 1956. respondent Collector of Internal Revenue issued the corresponding notice advising him that his income tax liability for that year amounted P9. Collector of Internal Revenue v. the judicial action may be begun at any time within ten (10) years after the discovery of the falsity. In this connection. 1953. A year later. and (c) the amended deficiency income tax assessment of April 8. L-8652. (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. In his answer respondent admitted some allegations the amended petition. could have been collected from him since then. and (b) by "judicial action" (Commonwealth Act 456. there was still due from him.554. Gancayco filed an amended petition praying that said Court: (a) Issue a writ of preliminary injunction. Reyes. Quezon. on November 14. respondent. however.793." (Tax Code. upon investigation. 1950. On motion of Gancayco. Sambrano v. Quezon issued on May 29. Zulueta. 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. Garces for respondent. not for the deficiency income tax involved in this proceedings.860.05.793. respondent issued a warrant of distraint and levy against the properties of Gancayco for the satisfaction of his deficiency income tax liability. section 316). petitioner. 1953 (Exhibit D). Upon petition of Gancayco filed on June 16. Gancayco urged another reconsideration (Exhibit O). 1961 x xx x xx x xx SANTIAGO GANCAYCO. 1956. 1951. it should be noted. requiring him to pay P16. The first may not be availed of except within three (3) years after the "return is due or has been made . 1956.62. On May 10. CONCEPCION. "cancelled" the aforementioned sale and enjoined respondent and the municipal treasurer of Catanauan. section 51 [d] ). for P29. . in connection with said sum of P9. Gancayco filed his income tax return for the year 1949. Hence. and so was the attempt to sell his properties in pursuance of said warrant. Avelino. 1957. respondent made three (3) assessments: (a) the original assessment of P9. or within five (5) years from the date of the assessment made within the statutory period. 1951. 1956. by the Collector of Internal Revenue and the taxpayer. but no action taken on this request. L-13325 April 20. inter alia. a notice of sale of said property at public auction on June 19. namely: (a) by distraint of personal property and levy upon real property. another notice of auction sale of his properties.31. so that the warrant of distraint and levy issued on May 15.: Petitioner Santiago Gancayco seeks the review of a decision of the Court of Tax Appeals. but for P9. the Court of Tax Appeals rendered. informed petitioner that his income tax defendant efficiency for 1949 amounted to P16.62. which was part granted by respondent. 1957. fraud or omission (Sections 331 and 332 of the Tax Code). No. respondent wrote the communication Exhibit C. 1950. the Court of Tax Appeals.860. Said assessment was. After the expiration of said Period.G. representation and farming expenses be allowed. In the case at bar. vs. 1956.793. On April 15.62. 1957). Thereafter Gancayco received from the municipal treasurer of Catanauan. 1950. Office of the Solicitor General and Special Attorney Antonio A. which he paid on May 15. because the income tax for 1949. L-8840. 1956.62. that. except that in the case of a false or fraudulent return with intent to evade tax or of a failure to file a return. After appropriate proceedings.31. the date of the original assessment. November 19. Quezon. Molina for petitioner. on May 14. J. to take place on August 29. Gancayco's income tax return for 1949 was filed on May 10. or within the period agreed upon. that there are two (2) civil remedies for the collection of internal revenue taxes. a efficiency income tax for the year 1949. The "judicial action" mentioned in the Tax Code may be resorted to within five (5) years from the date the return has been filed.31. 1957. 1956. and. Collector of Internal Revenue v. and accordingly.05. (b) the first deficiency income tax assessment of May 14. or on June 22. 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. (c) That even assuming that prescription had not set in the objections of petitioner to the disallowance of the entertainment. notifying Gancayco. made before the expiration of the period previously situated. in writing... income taxes may not be legally and validly collected by distraint and/or levy (Collector of Internal Revenue v. January 31. by way of deficiency income tax for the year 1949. per force. Gancayco maintains that the right to collect the deficiency income tax in question is barred by the statute of limitations. THE COLLECTOR OF INTERNAL REVENUE. in accordance with the procedure established by the National Internal Revenue Code. or within such extension of said stipulated period as may have been agreed upon. however. who in a letter dated April 8. 1950. long after the expiration of said three-year period. L-9202. Benjamin J. Two (2) days later. 1950. no statute of limitations to speak of. there never had been any cause for a judicial action against him. if there has been no assessment. was illegal and void. by resolution dated August 27. denied other allegations thereof an set up some special defenses. Subsequently. made on May 12. although he had sent several communications calling respondent's attention thereto. for P16. 1956. L-8685.860. which he paid forthwith. the sum of P29. in writing. plus surcharge and interest. the decision adverted to above.R. from proceeding with the same. February 8.

of a complaint for the collection of taxes. Republic Act No. 1125). At any rate. including stocks and other securities. equipment or materials. and interest in and rights to personal property. and other personal property of whatever character. this last assessment is what Gancayco contested in the amended petition filed by him with the Court of Tax Appeals. or the amount spent for improvement.) We concur in this view. debts. 1951.31 is due from Gancayco as deficiency income tax for 1949 hinges on the validity of his claim for deduction of two (2) items. bank accounts. it is not deductible but it may be amortized. Petitioner contends that the judicial action referred to in this provision is commenced by filing. Indeed. 1956. "The Court of Tax Appeals does not have original jurisdiction to entertain an action for the collection of the tax due. on June 15. 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 incarrying on any trade or business.05. credits. Inasmuch as those cases filed with courts of first instance constituted judicial actions. 1953. also.31. However. and (b) for representation expenses. 456. the nature of the proceedings before the Court of Tax Appeals. so that the statute of limitations does not bar the present proceedings. no deduction shall in any case be allowed in respect of any amount paid out for new buildings or for permanent improvements. if the same is a judicial action. P27. (Emphasis supplied. as contemplated in section 316 of the Tax Code. the date of the first deficiency income tax assessment or P29.860. See also. or effects. 1954 (Section 22.) Referring to the item of P27. chattels. an ordinary expense but a capitol expenditure.00. reconsidered or modified by the assessment made on April 8. therefore. and any increment thereto resulting from delinquency shall be (a) by distraint of goods. of property to which the taxpayer has not taken or is not taking title or in which he has no equity. living. fees.45. upon the ground that a. and c. . insofar as sections 316 and 332 of the Tax Code are concerned. like the one at bar. P8. The amount involved in such assessment which Gancayco refused to pay and respondent tried to collect by warrant of distraint and/or levy. in accordance with section 75 of Revenue Regulations No. the five-year period aforementioned should be counted from April 8. Hence. with a court of first instance. is the one in issue between the parties. Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes. upon Gancayco's request. and rentals or other payments required to be made as a condition to the continued use or possession. 2. This was true at the time of the approval of Commonwealth Act No. 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". because the same was. 1953. 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. 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. which is a necessary consequence of section 31 of the Tax Code. and (b) by judicial action. such is. or betterments made toincrease the value of any property or estate.459. but. No specification has been made as to the actual amount spent for purchase of tools. b. 1125 has vested the Court of Tax Appeals." Said Section 316 provides: The civil remedies for the collection of internal revenue taxes. traveling expenses while away from home in the pursuit of a trade or business.459. 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. which petitioner denies.933. for the purposes of the trade or business. "The remedies provided by law for the collection of the tax are exclusive. for farming expenses allegedly incurred by Gancayco. section 31 of the Revenue Code which provides that in computing net income. pursuant to which: (a) General Rule — In computing net income no deduction shall in any case be allowed in respect of — (1) Personal. 1939. namely: (a) for farming expenses. for P16. It is not. or family expenses. Respondent claims that the entire amount was spent exclusively forclearing and developing the farm which were necessary to place it in a productive state. cited above. No exemption shall be allowed against the internal revenue taxes in any case. likewise. or charges. instituted on April 12. including a reasonable allowance for salaries or other compensation for personal services actually rendered. not only with exclusive appellate jurisdiction to review decisions of the Collector (now Commissioner) of Internal Revenue in cases involving disputed assessments. Republic Act No. and by levy upon real property. (Emphasis supplied. Moreover.Neither could said statute have begun to run from May 14.860. "The proper party to commence the judicial action to collect the tax due is the government. Accordingly. The question whether the sum of P16.554.

(Liberty Banking Co. orchards. 525. This section is intended primarily. development and subdividing of real estate. 15 AFTR 746). when the taxpayer is directly or indirectly a beneficiary under such policy. apart from the absence of receipts. abstracts. it must be obtained under the provisions of the statute which permit deductions for amortization. individual or corporate. or any person financially interested in any trade or business carried on by the taxpayer. Such is not the case of petitioner herein. legal opinions on titles. clearing and grading. although not always necessarily. recording fees and surveys..52 was allowed. 542.97. The B. Such disallowance is justified by the record.45 disallowed. Commissioner. although there were no receipts an vouchers of the expenditures involved therein.933. 348-349. v. for. because in that case there was evidence on the amounts spent and the persons entertained and the necessity of entertaining them.753.) Gancayco's claim for representation expenses aggregated P31.R. Amounts expended in the development of farms. to cover expenditures of arecurring nature where the benefit derived from the payment is realized and exhausted within the taxable year. and ranches prior to the time when the productive state is reached may be regarded as investments of capital. 39 F (2d) 540. architects's fees and similar types of expenditures. 28 BTA 1128 aff'd 100 F [2d] 257 [CCA 3rd. (W. (4 Merten's Law of Federal Income Taxation.. Accordingly. restoration of soil. if the result of the expenditure is the acquisition of an asset which has an economically useful life beyond the taxable year. in order to be deductible under this section of the statute providing for the deduction of ordinary and necessary business expenses. depreciation.. the decision of the Court of Tax Appeals is hereby affirmed therefore. and P8. representing part of the cost of the land and was not deductible as an expense. The same treatment is to be accorded to amounts expended for maps. supra.108. p. Clark Thread Co. sec. invoices or vouchers of the expenditures in question.(2) Any amount paid out for new buildings or for permanent improvements. 1938].I.) Expenses for clearing off and grading lots acquired is a capital expenditure. (Merten's Law of Federal Income Taxation. likewise. 25. Heiner 37 F [2d] 703 [8AFTR 100111] [CCA 3rd]. 25. see also sec. 4 Merten's Law of Federal Income Taxation.17.) The cost of farm machinery. in accord with the consensus of the authorities on the subject. 75 of the income Regulation of the B. 25. Being in accordance with the facts and law. cited by petitioner is not in point.820. pp. commission paid in acquiring property are considered as representing part of the cost of the property acquired.L. (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made. Expenses incident to the acquisition of property follow the same rule as applied to payments made as direct consideration for the property. of which P22. no deduction of such payment may be obtained under the provisions of the statute. In such cases.20.S. For example. It is so ordered. The case of Cohan v. Emphasis supplied. Sec. petitioner could not specify the items constituting the same. or betterments made to increase the value of any property or estate. depletion or loss. or (4) Premiums paid on any life insurance policy covering the life of any officer or employee. An item of expenditure. . drilling wells. Marble Chair Company v. U.) Said view is. Other non-deductible expenses include amounts paid in connection with geological explorations. Harbeson Co. (Emphasis supplied. to the extent that a deduction is allowable. with costs against petitioner Santiago Cancayco. pp. Sec.B. or when or on whom or on what they were incurred. 337-338. 24 BTA. must fall squarely within the language of the statutory provision. equipment and farm building represents a capital investment and is not an allowable deduction as an item of expense.

they may transfer their own funds or property to the Sto.000. on the other hand. Nino PROJECT as a special fund to be known as the MANAGERS‘ account. x xxx 16.x DECISION YNARES-SANTIAGO. (b) The total of the MANAGERS‘ account shall not exceed P11. Nino PROJECT. Nino PROJECT. require at their option that property originally transferred by them to the Sto. [4] entered into an agreement with Baguio Gold Mining Company (‖Baguio Gold‖) for the former to manage and operate the latter‘s mining claim. x xxx 12. the PRINCIPAL (Baguio Gold) shall make available to the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS (P11.A. After all obligations of the PRINCIPAL in favor of the MANAGERS have been paid and satisfied in full. 2000 Decision of the [2] Court of Appeals in CA-G. this Agency shall remain subsisting. 49385. This Power of Attorney has been executed as security for the payment and satisfaction of all such obligations of the PRINCIPAL in favor of the MANAGERS and as a means to fulfill the same. that if the compensation of the MANAGERS as herein provided cannot be paid in cash from the Sto. NINO MINE. known as the Sto. Therefore.000. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and. provided. Nino PROJECT before income tax. Within three (3) years from date thereof. the ratio which the MANAGERS‘ account has to the owner‘s account will be determined. and. Since it is the desire of the PRINCIPAL to extend to the MANAGERS the benefit of subsequent appreciation of property. Benguet Province. for use in the MANAGEMENT of the STO. . SP No. the amount not so paid in cash shall be added to the MANAGERS‘ account. J. NINO MINE.000. It is understood that the MANAGERS shall pay income tax on their compensation. petitioner Philex Mining Corporation (Philex Mining). Chico-Nazario. Nino PROJECT after deduction therefrom of the MANAGERS‘ compensation. except that such transferred assets shall not include mine development.R. while the PRINCIPAL shall pay income tax on the net profit of the Sto. Reyes. 1971. and similar property which will be valueless. The parties‘ agreement was denominated as ―Power of Attorney‖ and provided for the following terms: 4. in the future. J. JJ. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the Sto. The said ELEVEN MILLION PESOS (P11. shall be carried by the Sto. NINO MINE. roads.000. Nino PROJECT. Case No. 148187 Present: Ynares-Santiago. except with prior approval of the PRINCIPAL. NINO MINE. upon a projected termination of this Agency. Respondent. Any part of any income of the PRINCIPAL from the STO. as the owner‘s account in the Sto. (Chairperson). The facts of the case are as follows: On April 16. [3] 2001 Resolution denying the motion for reconsideration.000. (c) The cash and property shall not thereafter be withdrawn from the Sto. Whenever the MANAGERS shall deem it necessary and convenient in connection with the MANAGEMENT of the STO.000. in such amounts as from time to time may be required by the MANAGERS within the said 3-year period. buildings. Promulgated: April 16.PHILEX MINING CORPORATION. Nino PROJECT. inclusive of the MANAGERS‘ account. may incur other obligations in favor of the MANAGERS. shall be added to such owner‘s account. Nino mine. Also assailed is the April 3.00.00) shall be deemed. this Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS is outstanding. The MANAGERS can. in accordance with the following arrangements: .: [1] This is a petition for review on certiorari of the June 30. 2008 x ---------------------------------------------------------------------------------------. together with the cash. G. which is left with the Sto.00). * Carpio Morales. shall be transferred to the MANAGERS. to the MANAGERS. (a) The properties shall be appraised and. Nino PROJECT be re-transferred to them. excluding the claims. Nino PROJECT until termination of this Agency. No. Until such assets are transferred to the MANAGERS. 5200.versus - COMMISSIONER OF INTERNAL REVENUE. however.T. Nachura. (d) The MANAGERS‘ account shall not accrue interest.R. for internal audit purposes. Petitioner. this Agency shall be revocable by the PRINCIPAL upon 36-month notice to the MANAGERS. which affirmed the Decision of the Court of Tax Appeals in C. located in Atok and Tublay. or of slight value. and the corresponding proportion of the entire assets of the STO. 5.

At the time the payments were made. which sum included liabilities of Baguio Gold to other creditors that petitioner had assumed as guarantor. formed part of Baguio Gold‘s ―pecuniary obligations‖ to petitioner.394.136. 1982. Notwithstanding any agreement or understanding between the PRINCIPAL and the MANAGERS to the contrary. and that the deduction did not consist of a valid and subsisting debt considering that. Paragraph 5(d) hereof shall be operative in case of the MANAGERS‘ withdrawal.860. These liabilities pertained to long-term loans amounting to US$11. under the management contract.000. 1994. What petitioner did was to pre-pay the loans as .00 and agreed to pay the same in three segments by first assigning Baguio Gold‘s tangible assets to petitioner. 20% delinquency interest due computed from February 10.00 as ―loss on settlement of receivables from Baguio [9] Gold against reserves and allowances.39 is hereby AFFIRMED.00 and then transferring its equitable title in its Philodrill assets for P16. Since the advanced amount partook of the nature of an investment.39. and (c) it was charged off within the taxable year when it was determined to be worthless. For a debt to be considered worthless. It held that the alleged debt was not ascertained to be worthless since Baguio Gold remained existing and had not filed a petition for bankruptcy.811.768. It also included payments made by petitioner as guarantor of Baguio Gold‘s long -term loans which legally entitled petitioner to be subrogated to the rights of the original creditor. The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of Baguio Gold could not be allowed as a bad debt deduction. it could not be deducted as a bad debt from petitioner‘s gross income.302. Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites for a bad debt deduction were satisfied. in view of the foregoing. Thereafter. ACCORDINGLY. which is the date after the 20-day grace period given by the respondent within which petitioner has to pay the deficiency amount x xx up to actual date of payment. the parties executed a ―Compromise with [7] Dation in Payment‖ wherein Baguio Gold admitted an indebtedness to petitioner in the amount of P179. In its 1982 annual income tax return. On October 28. The assessment in question.39.00. petitioner Philex Mining Corporation is hereby ORDERED to PAY respondent Commissioner of Internal Revenue the amount of P62.137. It instead characterized the advances as petitioner‘s investment in a partnership with Baguio Gold for the development and exploitation of the Sto. SO ORDERED. Baguio Gold undertook to pay petitioner in two segments by first assigning its tangible assets for P127. it became evident that it would not be able to recover the advances and payments it had made in behalf of Baguio Gold.‖ However.A. The parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to petitioner in the amount of P114. the BIR denied petitioner‘s protest for lack of legal and factual basis. [11] In the course of managing and operating the project.161.00 to the 1982 operations.245. Subsequently.051. 1982. petitioner deducted from its gross income the amount of P112. 1982.996. Philex Mining made advances of cash and property in accordance with paragraph 5 of the agreement.161.00. The CTA held that the ―Power of Attorney‖ executed by petitioner and Baguio Gold was actually a partnership agreement. the mine suffered continuing losses over the years which resulted to petitioner‘s withdrawal as manager of the mine on January 28. petitioner was to be paid fifty percent (50%) of the project‘s net [10] profit. It is enough that a taxpayer exerted diligent efforts to enforce collection and exhausted all reasonable means to collect. petitioner claimed that it was neither required to institute a judicial action for collection against the debtor nor to sell or dispose of collateral assets in satisfaction of the debt. However. x xxx [5] Petitioner emphasized that the debt arose out of a valid management contract it entered into with Baguio Gold.811. (b) the debt was ascertained to be worthless.136. Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment.17. the parties executed an ―Amendment to Compromise [8] with Dation in Payment‖ where the parties determined that Baguio Gold‘s indebtedness to petitioner actually amounted to P259.426. The CTA rejected petitioner‘s assertion that the advances it made for the Sto. Nino mine.768.811. transferring to the latter Baguio Gold‘s equitable title in its Philodrill assets and finally settling the remaining liability through properties that Baguio Gold may acquire in the future. pursuant to the management contract. On December 31.838. plus.000. viz: FAS-1-82-88-003067 for deficiency income tax in the amount of P62. Baguio Gold was not in default since its loans were not yet due and demandable. Petitioner also asserted that due to Baguio Gold‘s irreversible losses.000. on September 27.000. This time.000. The MANAGERS shall not in any manner be held liable to the PRINCIPAL by reason alone of such withdrawal. to wit: (a) there was a valid and existing debt.00. 1995. 1982 and in [6] the eventual cessation of mine operations on February 20. as follows: WHEREFORE. The bad debt deduction represented advances made by petitioner which. the MANAGERS may withdraw from this Agency by giving 6-month notice to the PRINCIPAL.00 to allowances and reserves that were set up in 1981 and P2.161. petitioner wrote off in its 1982 books of account the remaining outstanding indebtedness of Baguio Gold by charging P112. the Bureau of Internal Revenue (BIR) disallowed the amount as deduction for bad debt and assessed petitioner a deficiency income tax of P62. the instant Petition for Review is hereby DENIED for lack of merit.00 contracted by Baguio Gold from the Bank of America NT & SA and Citibank N. Nino mine were in the nature of a loan.

Citibank imposed and collected a ―pre-termination penalty‖ for the pre-payment. upon [13] denial of its motion for reconsideration. petitioner took this recourse under Rule 45 of the Rules of Court. Hence.evidenced by the notice sent by Bank of America showing that it was merely demanding payment of the installment and interests due. alleging that: [12] . Moreover. The Court of Appeals affirmed the decision of the CTA.

Under the ―Power of Attorney‖. petitioner and Baguio Gold were to contribute equally to the joint venture assets under their respective accounts. petitioner and Baguio Gold undertook to contribute money. III. two or more persons bind themselves to contribute money. the parties‘ contractual intent must first be discovered from the expressed language of the primary contract under which the parties‘ business relations were founded. and a particular partnership may have for its object a specific undertaking. it has been held that it may enter into a joint venture which is akin to a particular partnership: The legal concept of a joint venture is of common law origin. Pursuant to paragraphs 4 and 5 of the agreement. It did not define that relationship or indicate its real character. It has no precise legal definition. Petitioner insists that in determining the nature of its business relationship with Baguio Gold. They also had a joint interest in the profits of the business as shown by a 50-50 sharing in the income of the mine. like petitioner. Meanwhile. However. petitioner‘s contribution would consist of its expertise in the management and operation of mines. while the joint venture is formed for the execution of a single transaction. that under paragraph 5 of the agreement.I. x xx It would seem therefore that under Philippine law. as well as the manager‘s account w hich is comprised of P11M in funds and property and petitioner‘s “compensation” as manager that cannot be paid in cash. in addition to its actual mining claim. and a mutual right of control. cannot generally enter into a contract of partnership unless authorized by law or its charter. Under a contract of partnership. The petition lacks merit. property. Nino Mine pursuant to the Power of Attorney partook of the nature of an investment rather than a loan. The Court of Appeals erred in construing that the advances made by Philex in the management of the Sto. It should be noted that the compromise agreements were mere collateral documents executed by the parties pursuant to the termination of their business relationship created under the ―Power of Attorney‖. The compromise agreements were executed eleven years after the ―Power of Attorney‖ and merely laid out a plan or procedur e by which petitioner could recover the advances and payments it made under the ―Power of Attorney‖. allegedly evinced the parties‘ intent to treat the advances and payments as a loan and establish a creditor-debtor relationship between them. but also on the subsequent ―Compromise with Dation in Payment‖ and ―Amended Compromise with Dation in Payment‖ that the parties executed in 1982. On the other hand. x xx This observation is not entirely accurate in this jurisdiction. Before resort may be had to the two compromise agreements. IV. The Supreme Court has however recognized a distinction between these two business forms. In this regard. The Court of Appeals erred in refusing to delve upon the issue of [14] the propriety of the bad debts write-off. or industry to a [15] common fund. and is thus of a temporary nature. since under the Civil Code. Niño [17] mine. a joint venture is a form of partnership and should be governed by the law of partnerships. Nino Mine notwithstanding the clear absence of any intent on the part of Philex and Baguio Gold to form a partnership. it is the latter which established the juridical relation of the parties and defined the parameters of their dealings with one another. Nino Mine indicates that Philex is a partner of Baguio Gold in the development of the Sto. Baguio Gold would contribute P11M under its owner‘s account plus any of its income that is left in the project. we note that there is a substantive equivalence in the respective contributions of the parties to the development and operation of the mine. property and industry to the common fund known as the Sto. The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the Sto. x xx (Citations omitted) Perusal of the agreement denominated as the ―Power of Attorney‖ indicates that the parties had intended to create a partnership and establish a common fund for the purpose. petitioner asserts that it could not have entered into a partnership agreement with Baguio Gold because it did not ―bind‖ its elf to contribute money or property to the project. II. The Court of Appeals erred in relying only on the Power of Attorney and in completely disregarding the Compromise Agreement and the Amended Compromise Agreement when it construed the nature of the advances made by Philex. sharing of profits and losses. The execution of the two compromise agreements can hardly be considered as a subsequent or contemporaneous act that is reflective of the parties‘ true intent. but it has been generally understood to mean an organization formed for some temporary purpose. we should not only rely on the ―Power of Attorney‖. An examination of the ―Power of Attorney‖ reveals that a partnership or joint venture was indeed intended by the parties. and has held that although a corporation cannot enter into a partnership contract. it may however engage in a joint venture with [16] others. While a corporation. x xx It is in fact hardly distinguishable from the partnership. since their elements are similar – community of interest in the business. x xx The main distinction cited by most opinions in common law jurisdictions is that the partnership contemplates a general business with some degree of continuity. a partnership may be particular or universal. with the intention of dividing the profits among themselves. it was only optional for petitioner to transfer funds or property to the Sto. Niño project ―(w)henever the . These documents. The parties entered into the compromise agreements as a consequence of the dissolution of their business relationship. The lower courts correctly held that the ―Power of Attorney‖ is the instrument that is material in determining the true nature of the business relationship between petitioner and Baguio Gold.

. for any amount over and above the proportion agreed upon in the ―Power of Attorney‖. or collateral. in which the former was to manage and operate the latter‘s mine through the parties‘ mutual contribution of material resources and industry. As can be seen. it does not appear that Baguio Gold was unconditionally obligated to return the advances made by petitioner under the agreement. It should be stressed that the main object of the ―Power of Attorney‖ was not to confer a power in favor of petitioner to contract with third persons on behalf of Baguio Gold but to create a business relationship between petitioner and Baguio Gold. there is no reason for Baguio Gold to hold itself liable to petitioner under the compromise agreements. the latter may not necessarily be a contract of agency. NIÑO MINE. As pointed out by the Court of Tax Appeals. but only the return of an amount pegged at a ratio which the manager‘s account had to the owner‘s account. The contributions acquired an obligatory nature as soon as petitioner had chosen to exercise its option under paragraph 5. There is no merit to petitioner‘s claim that the prohibition in paragraph 5(c) against withdrawal of advances should not be taken as an indication that it had entered into a partnership with Baguio Gold. Neither can paragraph 16 of the agreement be taken as an indication that the relationship of the parties was one of agency and not a partnership. It should be pointed out that in a contract of loan. petitioner became bound by its contributions once the transfers were made.‖ Petitioner asserts. Where representation for and in behalf of the principal is merely incidental or necessary for the proper discharge of one‘s paramount undertaking under a contract. even one that is coupled with interest. thus rendering effective the other stipulations of the contract. and the manner of payment was unclear. the non-revocation or non-withdrawal under paragraph 5(c) applies to the advances made by petitioner who is supposedly the agent and not the principal under the contract. however. inclusive of the MANAGERS‘ account. however. In this case. NINO MINE. Although the said provision states that ―this Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS is outstanding. excluding the [22] claims‖ shall be transferred to petitioner. a provision that is more consistent with a partnership than a creditor-debtor relationship.‖ it does not necessarily follow that the parties entered into an agency contract coupled with an interest that cannot be withdrawn by Baguio Gold. we find no contractual basis for the execution of the two compromise agreements in which Baguio Gold recognized a debt in favor of petitioner. that no such inference can be drawn against it since its share in the profits of the Sto Niño project was in the nature of compensation or ―wages of an employee‖. The ―Power of Attorney‖ clearly provides that petitioner would only be entitled to the return of a proportionate share of the mine assets to be computed at a ratio that the manager‘s account had to the owner‘s account. but some [21] other agreement depending on the ultimate undertaking of the parties. it cannot be inferred from the stipulation that the parties‘ relation under the agreement is one of agency coupled with an interest and not a partnership. The essence of an agency. nor a specific deed evidencing the terms and conditions of such loans. the tax court correctly concluded that the agreement provided for a distribution of assets of the Sto. is the agent‘s ability to represent his principal and bring about business relations between the latter and third [20] persons. Article 1769 (4) of the Civil Code explicitly provides that the ―receipt by a person of a share in the profits of a business is prima facie evidence that he is a partner in the business. which supposedly arose from the termination of their business relations over the Sto. [19] or the mutual interest of both principal and agent. The strongest indication that petitioner was a partner in the Sto Niño mine is the fact that it would receive 50% of the net profits as ―compensation‖ under paragraph 12 of the agreement. under the exception provided in Article [24] 1769 (4) (b). and the corresponding proportion of the entire assets of the STO. that the stipulation only showed that what the parties entered into was actually a contract of agency coupled with an interest which is not revocable at will and not a partnership. Nino mine. ―the ratio which the MANAGER‘S account has to the owner‘s account will be determined. In this case. Except to provide a basis for claiming the advances as a bad debt deduction. Paragraph 5 (d) thereof provides that upon termination of the parties‘ business relations. the tax court correctly observed that it was unlikely for a business corporation to lend hundreds of millions of pesos to another corporation with neither security. In an agency coupled with interest. the totality of the circumstances and the stipulations in the parties‘ agreement indubitably lead to the conclusion that a partnership was formed between petitioner and Baguio Gold. All these point to the inevitable conclusion that the advances were not loans but capital contributions to a partnership. The entirety of the parties‘ contractual stipulations simply leads to no other conclusion than that petitioner‘s ―compensation‖ is actually its share in the income of the joint venture. petitioner was merely entitled to a proportionate return of the mine‘s assets upon dissolution of the parties‘ business relations. The parties also did not provide a specific maturity date for the advances to become due and demandable. In this case. particularly paragraph 5(c) which prohibits petitioner from withdrawing the advances until termination of the parties‘ business relations. In this connection. Thus. a person who receives a loan or money or any fungible thing acquires ownership thereof and is bound to pay the creditor an equal amount of [23] the same kind and quality.MANAGERS shall deem it necessary and convenient in connection with the [18] MANAGEMENT of the STO.‖ The wording of the parties‘ agreement as to petitioner‘s contribution to the common fund does not detract from the fact that petitioner transferred its funds and property to the project as specified in paragraph 5. it is the agency that cannot be revoked or withdrawn by the principal due to an interest of a third party that depends upon it. First. There was nothing in the agreement that would require Baguio Gold to make payments of the advances to petitioner as would be recognized as an item of obligation or ―accounts payable‖ for Baguio Gold. Thus. there was no stipulation for Baguio Gold to actually repay petitioner the cash and property that it had advanced. Next. Niño mine upon termination.

which affirmed the decision of the Court of Tax Appeals in C. By pegging its compensation to profits. who must prove by [27] convincing evidence that he is entitled to the deduction claimed. In sum. The decision of the Court of Appeals in CA-G. Deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer. Consequently. Indeed. petitioner cannot claim the advances as a bad debt deduction from its gross income.811. SP No. 1995.31. Nino mine. the tax court correctly noted that petitioner was not an employee of Baguio Gold who will be paid ―wages‖ pursuant to an employeremployee relationship. we find no reason to depart from the tax court‘s factual finding that Baguio Gold‘s debts were not yet due and demandable at the time that petitioner paid the same. Verily. petitioner also stood not to be remunerated in case the mine had no income. 49385 dated June 30. To begin with. we find that petitioner‘s ―compensation‖ u nder paragraph 12 of the agreement actually constitutes its share in the net profits of the partnership. All told. petitioner pre-paid Baguio Gold‘s outstanding loans to its bank creditors [26] and this conclusion is supported by the evidence on record. SO ORDERED. Petitioner Philex Mining Corporation is ORDERED to PAY the deficiency tax on its 1982 income in the amount of P62. The ―compensation‖ agreed upon only serves to reinforce the notion that the parties‘ relations were indeed of partners and not employer -employee. In this case.R. with 20% delinquency interest computed from February 10. it could not claim the advances as a valid bad debt deduction. Nino mine.On this score.T. if it were truly just an ordinary employee. WHEREFORE. 2000. As for the amounts that petitioner paid as guarantor to Baguio Gold‘s creditors. Consequently. which is the due date given for the payment of the deficiency income tax. up to the actual date of payment. Case No. petitioner was the manager of the project and had put substantial sums into the venture in order to ensure its viability and profitability. 5200 is AFFIRMED. considering that the ―Power of Attorney‖ also provided for an almost equal contribution of th e parties to the St. The advances were not ―debts‖ of Baguio Gold to petitioner inasmuch as the latter was under no unconditional obligation to return the same to the former under the ―Power of Attorney‖. It is hard to believe that petitioner would take the risk of not being paid at all for its services.A. petitioner would not be entitled to an equal share in the income [25] of the mine if it were just an employee of Baguio Gold.161. petitioner failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross income. . the lower courts did not err in treating petitioner‘s advances as investments in a partnership known as the Sto. It is not surprising that petitioner was to receive a 50% share in the net profits. the petition is DENIED.

Precincts Nos. and that. Capiz. 249 involves many precincts not included in Election Cases Nos.: Petitioner Mariano H. 1965. 3. Precincts Nos. 32 and 36 of Panitan. 246. respondent Judge had set the production and opening of the ballot boxes of said precincts. 1965. 1965. for the reason that her failure to file her answer prior thereto was due to the fact that she had not been seasonably advised of our first resolution of December 8. 2. Petitioner's counsel and that of the Commission on Elections then appeared and argued before this Court. 14. 26. 242 and 245. 1965. in addition to other election precincts (namely. and to restrain him from acting upon the aforesaid petitions for judicial recount of respondent Consing. vs. 1965. 63. 1 of Cuartero.. for December 27. 29 and 32 of Dao. A similar proceeding was initiated by respondent Consing on December 4. 15 and 22 of Dao. on November 26. 15. Meanwhile. 242 of the Court of First Instance of Capiz had been dismissed on December 8. 27 and 34 of Panay. 5. 242 of the Court of First Instance of Capiz. continuing its aforementioned restraining order "until further advice". 242 and 245. 1965 Judge Golez issued an order denying said motion and giving Acuna three (3) days within which to take up the matter with the Supreme Court. for the judicial recount of the votes cast in precincts Nos. Answering this supplemental petition. 16. Precincts Nos. 19. 2. in the copy of the Nacionalista Party of the election returns for said precinct. 17 and 18 of Ivisan. 245 of said Court of First Instance. 15. respondent Consing instituted Election Case No. acting upon the petition in said Election Case No. Consing were candidates of the Liberal Party and the Nacionalista Party. 18. Precinct 9 of Panay. 21. 249 are different from those involved in Election Cases Nos. but on December 2. 1. and setting the case for hearing on December 15. for purposes of recount. 9. which had been similarly dismissed: that the issues raised or questions posed in said Election Case No. 1965. 12. to take effect immediately and up to and including December 16. and that. CONCEPCION. 3. Judge — one of the respondents herein — for the judicial recount of the votes cast in Precinct No. we note that. 14. but included in Election Cases Nos. 242 and 245 merely to forestall a technical objection thereto. 22 and 32 of Dao. 1965. 1. L-25399 January 27. 25. HON. CesarioGolez. 36 of Panitan — respondent Consing claims that the entries in the Nacionalista copy of the corresponding election returns are illegible. petitioner Acuña had filed an urgent supplemental petition alleging that respondent Consing had caused said Election Cases Nos. however. Precinct No. or on December 8. 16. 62. respectively. 1965. No. 19. 16. 12. 8. Precinct No. 242 and 245 to he dismissed. 249. J. 2. Capiz. petitioner. 91 and 93 of Roxas City). 89. and Judge Golez and the Commission on Elections. ACUÑA. 74. 1 of the municipality of Cuartero. 1965. 83. 1 of Cuartero. respondent Consing filed a motion praying that this resolution of December 15. 242 and 245. not to circumvent the effect of our restraining order herein. this Court. and Precinct No. thereafter. 81. Precinct No. ETC. the case be set for trial on the merits. Precincts Nos. and that the supplemental petition is premature. for a writ of certiorari and prohibition to annul said order of Judge Golez. 8. with respect to six (6) precincts — namely. 10. 1965. Precincts Nos. 14. petitioner Acuña prayed that the restraining order therefor issued by this Court be extended to said Election Case No. Precinct No. 1. be set aside. Acuña and respondent Carmen D. 1966. 53. or on December 3. On December 17. 249 is predicated upon alleged discrepancies between the entries in the Nacionalista copy of the corresponding election returns and those in the copies of the provincial treasurer submitted to the Provincial Board of Canvassers. which was attached to the motion. petitioner Acuna moved to dismiss the petition in said case. 249 and that the same be included in the determination of the legal issues and questions raised in the present action. 27 and 30 of Pilar. 9. Capiz. Her petition for recount as regards the fifty-three (53) other precincts involved in Election Case No. presided over by Hon. 1965. 1965. A. Precincts Nos. CESARIO GOLEZ. 1965. that respondent Consing had. 1965. The issues thus raised in connection with these two (2) sets of election returns have. Soon thereafter. for the purpose of evading the effects of the aforementioned restraining order issued by this Court. or on December 7. 13. 5. 16. 16 of Dumarao. upon the other hand. 247 and 248. petitioner Acuña instituted the present action against respondent Consing. respondents. 16. 18. 244. 1966 MARIANO H. 242 and 245. Acting upon the motion of respondent Consing dated December 17. 1965. 3. 1965. 1965. Premised upon these allegations. respondent Consing commenced Election Case No. Four days later respondent Consing moved to dismiss the present case upon the ground that the aforementioned Election Case No. Leonardo Amores for the petitioner.R. 6. 15. 20 and 23 of President Roxas and Precincts Nos. Precincts Nos. 21. Forthwith. dated December 15. 1965. upon the ground that the entry in the column for names of the candidates for said office. dated December 2. for the office of Representative for the First District of Capiz in the general elections held on November 9. in violation of the provisions thereof. 25 of Pontevedra. based upon the same grounds relied upon in said Election Cases Nos. The next day. 15. While the provincial board of canvassers of Capiz was canvassing the election returns for said congressional district. 249 of said Court of First Instance for the judicial recount of the votes cast in the election precincts involved in said Election Cases Nos. upon the ground that there were discrepancies between the entries in the copies for the Nacionalista Party of the election returns for said precincts and those in the corresponding copies of the election returns in the possession of the Provincial Treasurer. upon the ground that the lower court had not acquired jurisdiction to entertain said petitions or that the same were premature. filed Election Case No.. 17 and 22) of the municipality of Dumarao. 22.G. moreover. 17. that she had sought the dismissal of Election Cases Nos. one . issuing a restraining order. 1965. on December 22. on December 23. 12. At the outset. ET AL. 19. Precincts Nos. 25. could not be read. 3. that she be allowed to file her answer. On December 1. respondent Consing alleged. reset the case for hearing on January 7.C. we passed a resolution requiring respondents herein to file their answer on or before December 13. and 22 of Dumarao. which passed a resolution. 1965. with respect to nine (9) precincts (seemingly precincts Nos. that Election Case No.R. Dinglasan for the respondents.

another for the municipal treasurer. Manahan. In fact. Section 150 of the Revised Election Code provides that "immediately after the count. in general. the two (2) major political parties are provided with one (1) copy each of the election returns for each precinct. be distributed as follows: one copy shall be placed in the box for valid ballots. L-22540. pursuant to which: In case it appears to the provincial board of canvassers that another copy or other authentic copies of the statement from an election precinct submitted to the board give to a candidate a different number of votes and difference affects the results of the election. when there is a discrepancy between the copies of election returns for the provincial treasurer. however. of detecting the irregularity. owing to the probability. This decision should not be understood. should there be any. petitioner. No. 1959. the existence of said additional copies in the possession of the major political parties may have a general salutary effect. upon motion of the board or of any candidate affected. one for the ballot box. 249.point in common. and that of the constituency of the first congressional district of Capiz. respondent). requiring the preparation of additional copies of the election returns and the distribution thereof among the two (2) major political parties. by registered mail. because of the special nature of the authority conferred therein and because otherwise that authority could be so used as to delay the proclamation of the winning candidate beyond the date set for the beginning of the term of the office involved. January 30. G. without prejudice to such steps. for we do not believe that said resolution contravenes the law. we dismissed. in applying Section 163 of the Revised Election Code. on October 20. L-16268. the issue in connection with these precincts is substantially the same as that raised with respect to the precincts of Cuartero. Notice of such proceeding shall be given to all candidates affected. under Section 163 of the Revised Election Code. Indeed. Acuña and against respondent herein. Baron. the main issue before us boils down to whether. still another for the provincial treasurer and the last for the Commission on Elections. Quicho. 1964).) the phrase "another copy or other authentic copy" therein used shall or may be construed to include of theadditional copies thus required. who are hereby enjoined perpetually from proceeding with the judicial recount of the votes cast in the precincts involved in said Election Case No. The Commission on Elections. for the simple reason that in using the aforementioned phrase. in said Case No. Dao and Dumarao. Lawsin vs.R. 1965. the petition for lack of merit. Estenzo. Upon mature consideration of the pros and cons of the aforementioned question. on the other. in the case of national offices. and. . in his capacity as President of the Party for Philippine Progress [PPP]. Since the original petition herein referred only to election precincts in the municipalities of Cuartero. in order that the undue obstacle offered by Election Case No. 1960. L-25144 (Manuel P. this would not necessarily detract from the authority of the Comelec to issue it or affect its validity. measures or proceedings as may be appropriate in an election protest. in particular. Panay. and. whose incumbents may hold over. for no such copies were prescribed in the Code. is denied and judgment is hereby rendered in favor of petitioner Mariano H. July 31. 488 thereof. the framers of the Revised Election Code evidently had in mind the four (4) copies mentioned in Section 150 thereof and intended. the copies of either of the major political parties participating in the elections. otherwise referred to in Section 151 as "election returns". 1äwphï1. No. L-16259. to the Commission on Elections. and the fourth shall be forwarded. another copy shall be delivered to the municipal treasurer. At any rate. whether the copy of the election returns for either of the major political parties may properly be used as basis for the judicial recount authorized in Section 163 of the Revised Election Code — which should be decided in the negative. President Roxas and Roxas City? As above indicated. 249 of Capiz to the completion of the canvass of the election returns for the aforementioned district may be removed and the result of the elections in said district proclaimed without further delay. at the expense of the true choice of the electorate. Pilar. by means of a supplemental petition. 1949). but by the Commission on Elections. for which there is no hold over. Wherefore. complete and sign a written statement thereof in quadruplicate" (emphasis ours). L-3483 (December 16. the lawmakers could not have referred to any other copies. even if said resolution were deemed unwise. in that it may discourage or deter the tampering of the four (4) copies contemplated in Section 150. the Board of Inspectors shall make. It is so ordered. Pursuant. to leave the office without any incumbent. the Court of First Instance of the province. Panitan. the effect of said delay is. In other words. the Court is of the considered opinion that the same must be decided in the negative.R.ñët In this connection. vs. The necessity of avoiding this contingency becomes apparent when we consider that. a determination of the propriety of the petition for a judicial recount as regards precincts of the municipalities of Ivisan. December 29. Samson vs. the motion to dismiss filed by respondent Carmen D. the third copy shall be sent by registered mail to the provincial treasurer. not by law. Consing on December 17. (Emphasis ours. in the case of local offices. is it proper to seek in this action. when the Party for Philippine Progress filed its petition in Case G. to a resolution of the Commission on Elections in Case No. on the one hand. namely: whether a judicial recount may be ordered. however. as annulling the resolution. likewise. The four (4) copies of this statement. To be sure. pursuant to Section 152 of said Code. if not certainty. Dao and Dumarao — namely. we have consistently adhered to the view that Section 163 of the Revised Election Code should be construed restrictively (Parlade vs. It is obvious to us that the interest of justice and equity. 1965. must. 488 of the Commission on Elections. Escalona. As a consequence. demand that petitioner's supplemental petition be favorably entertained. may proceed to recount the votes cast in the precinct for the sole purpose of determining which is the true statement or which is the true result of the count of the votes cast in said precinct for the office in question. Pontevedra. to often permit the defeated candidate to unduly extend his tenure. since Provincial Board vs.

255.000.15 —————— P 37.00 ——————— 35% Transaction tax due thereon 16.00. Nos.000.000 ) —————— 17.302. 106984-85 December 1.R. vs.036.75 (P0.523.75 Add: 14% int.093.00 Science Stamps Tax Due (P0.009.30 x P100. G. respondents.000.90 Documentary and Science Stamps Tax Total face value of .000. COURT OF APPEALS.58 The Paper Industries Corporation of the Philippines ("Picop").00 Interest payments on Documentary Stamps money market Tax Due borrowings P 45. fr.R.025. respondents.: 3-31-83 10. Nos. and (b) the other for deficiency income tax for 1977.849.020.147. and as a preferrednon-pioneer enterprise with respect to its integrated plywood and veneer mills. 106984-85. —————— T o t a l P 20. 1995 PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP). petitioner.826.768. 1995 COMMISSIONER INTERNAL REVENUE. is a Philippine corporation registered with the Board of Investments ("BOI") as a preferred pioneer enterprise with respect to its integrated pulp and paper mill. for an aggregate amount of P88.30 x P100. fr.00 Add: 25% surcharge 4.57 20% int.000 ) ( P200 ) P 150. On 21 April 1983.794.675. vs. Nos. which is petitioner in G. 106949-50 and private respondent in G. PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES. 106949-50 December 1.183. These assessments were computed as follows: Transaction Tax debentures P100. Picop received from the Commissioner of Internal Revenue ("CIR") two (2) letters of assessment and demand both dated 31 March 1983: (a) one for deficiency transaction tax and for documentary and science stamp tax.R. Nos. THE COURT OF APPEALS and THE COURT OF TAX APPEALS. petitioner. J.R.771. 8-1-80 to FELICIANO. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS.763.005.000. 1-20-78 to 7-31-80 P 7.G.

56 20% int.094. 5186 P 44.654.00 Income tax due thereon 34. No.309.00 Add: Unallowable deductions 1) Disallowed deductions availed of under R.664.194.00 Add: 14% int.644.00 5) Overstatement of cost of sales 604.00 Add: Compromise for non-affixture 300.00 —————— 300.00 2) Capitalized interest expenses on funds used for acquisition of machinery & other equipment 42.34 —————— P16.90 =========== Deficiency Income Tax for 1977 Net income per return P 258.A.128.014.000.00 —————— TOTAL AMOUNT DUE AND COLLECTIBLE P 38.734.00 —————— P91. 8-1-80 to 4-15-81 4.300. fr.00 Net income per investigation P91.242.886.201.( P200 ) P 150.421.00 —————— Deficiency P34.166.018. 4-15-78 to 7-31-81 P 11.332. fr.000.559.406.00 3) Unexplained financial guarantee expense 1.237.00 4) Understatement of sales 2.00 Less: Tax already assessed per return 80.358.503.391.360.980.00 —————— T o t a l P 300.131.745.840.90 —————— .

543. On 26 April 1983. on 23 August 1993.).TOTAL AMOUNT DUE AND COLLECTIBLE P 50.338. It assails the propriety of the thirty-five percent (35%) deficiency transaction tax which the Court of Appeals held due from it in the amount of P3. on Picop's deficiency income tax. and interest at twenty percent (20%) per annum for a maximum of three (3) years.946.15.133. Thereupon. in effect. insists that the Court of Appeals erred in finding Picop not liable for surcharge and interest on unpaid transaction tax and for documentary and science stamp taxes and in allowing Picop to claim as deductible expenses: (a) the net operating losses of another corporation (i. for a period of three (3) years from 21 May 1983. 106949-50 and 106984-85 and required the parties to file their Memoranda.75. Picop now maintains that it is not liable at all to pay any of the assessments or any part thereof. Whether Picop is liable for: . PICOP is declared liable for the 35% transaction tax in the amount of P3. Picop protested the assessment of deficiency transaction tax and documentary and science stamp taxes. Picop went before the Court of Tax Appeals ("CTA") appealing the assessments.543.481. In two (2) Resolutions dated 7 February 1990 and 19 February 1990. and (b) interest payments on loans for the purchase of machinery and equipment. the CIR denied Picop's protests.300. These cases were consolidated and.33.349. Inc. Rustan Pulp and Paper Mills. to enforce collection of the contested assessments. The CIR. the CIR issued a warrant of distraint on personal property and a warrant of levy on real property against Picop.00. The dispositive portion of the Court of Appeals decision reads as follows: WHEREFORE. The judgment against PICOP is modified.947.813.984. and for a surcharge of ten percent (10%).762. 3.00 Deficiency Income Tax Due 3. the CIR contends that Picop is liable for the corporate development tax equivalent to five percent (5%) of its correct 1977 net income. No pronouncement as to costs. The Court of Appeals consolidated the two (2) cases and rendered a decision. or P88. which was itemized in the dispositive portion of the decision as follows: 35% Transaction Tax P 16. the Court resolved to give due course to both Petitions in G. resulting from disallowance of certain claimed financial guarantee expenses and claimed year-end adjustments of sales and 3 cost of sales figures by Picop's external auditors. The CIR also claims that Picop should be held liable for interest at fourteen percent (14%) per annum from 15 April 1978 for three (3) years. Nos.90 =========== 1 2. or in the total amount of P888.00 and the compromise penalty of P300.762. On 26 September 1984. respectively.113.51. the Court referred the two (2) Petitions to the Court of Appeals. The issues which we must here address may be sorted out and grouped in the following manner: I. Picop also questions the imposition by the Court of Appeals of the deficiency income tax of P1. the CTA rendered a decision dated 15 August 1989. upon the other hand. SO ORDERED.70. These protests were not formally acted upon by respondent CIR.668.51. modifying the findings of the CIR and holding Picop liable for the reduced aggregate amount of P20..020.000. PICOP is absolved from the payment of documentary and science stamp tax of P300.15. PICOP shall pay 20% interest per annum on the deficiency income tax of P1.578. as follows: 1. Finally.49.133.20 Documentary & Science Stamp Tax 300.e.53 =========== Picop and the CIR both went to the Supreme Court on separate Petitions for Review of the above decision of the CTA.579.33 —————— TOTAL AMOUNT DUE AND PAYABLE P 20.578. which further reduced the liability of Picop to P6. After trial.R. 2 Picop and the CIR once more filed separate Petitions for Review before the Supreme Court. Picop also protested on 21 May 1983 the deficiency income tax assessment for 1977. dated 31 August 1992.579.481. and a surcharge of 10% on the latter amount. the appeal of the Commissioner of Internal Revenue is denied for lack of merit.354.

is hereby further amended by adding a new section thereto to read as follows: Sec.864. and III. as amended. premiums and other payments which form integral parts of the charges imposed as a consequence of the use of money. II.e. and (2) Whether Picop is liable for the corporate development tax of five percent (5%) of its net income for 1977. where no interest rate is stated or if the rate stated is lower than the prevailing interest rate at the time of the issuance or renewal of commercial paper. Tax on certain interest. i. be lower than the interest rate prevailing at the time of the issuance or renewal of the commercial paper. Whether Picop is entitled to deductions against income of: (1) interest payments on loans for the purchase of machinery and equipment. I.000. — There shall be levied. . the CIR required Picop to pay the thirty-five percent (35%) transaction tax. We will consider these issues in the foregoing sequence. assessed. a transaction tax equivalent to thirty-five percent (35%) based on the gross amount of interest thereto as defined hereunder. including banks and non-banks performing quasi-banking functions. (1) Whether Picop is liable for the thirty-five percent (35%) transaction tax. In all cases. In respect of these interest payments. 1. that in the case of a long-term commercial paper whose maturity exceeds more than one year.(1) the thirty-five percent (35%) transaction tax. either with or without recourse and irrespective of maturity. commercial papers are promissory notes and/or similar instruments issued in the primary market and shall not include repurchase agreements.. and (3) certain claimed financial guarantee expenses. the borrower shall pay the tax based on the amount of interest corresponding to one year. and such other debt instruments issued in the secondary market. 195-C. however. in no case. from 24 December 1977 to 23 December 1978.00.771. shall adjust the interest rate in accordance herewith. Principally.. which shall be paid by the borrower/issuer: Provided. (2) interest and surcharge on unpaid transaction tax. which is issued. the Commissioner of Internal Revenue. transferred or in any manner conveyed to another person or entity. which reads in part as follows: Sec. For purposes of this tax — (a) "Commercial paper" shall be defined as an instrument evidencing indebtedness of any person or entity. 1154 dated 3 June 1977.849. Inc. certificates of participations. endorsed.00 and a maturity period of one (1) year. commissions. (2) net operating losses incurred by the Rustan Pulp and Paper Mills. collected and paid on every commercial paper issued in the primary market as principal instrument. certificates of assignments. On these promissory notes. The National Internal Revenue Code. Picop issued commercial paper consisting of serially numbered promissory notes with the total face value of P229. (1) Whether Picop had understated its sales and overstated its cost of sales for 1977. upon consultation with the Monetary Board of the Central Bank of the Philippines. and thereafter shall pay the tax upon accrual or actual payment (whichever is earlier) of the untaxed portion of the interest which corresponds to a period not exceeding one year. The CIR based this assessment on Presidential Decree No. sold. and (3) documentary and science stamp taxes. Interest shall be deemed synonymous with discount and shall include all fees. and assess the tax on the basis thereof. These promissory notes were purchased by various commercial banks and financial institutions. Picop paid interest in the aggregate amount of P45. (b) The term "interest" shall mean the difference between what the principal borrower received and the amount it paid upon maturity of the commercial paper which shall. The transaction tax imposed in this section shall be a final tax to be paid by the borrower and shall be allowed as a deductible item for purposes of computing the borrower's taxable income. With the authorization of the Securities and Exchange Commission.

Being a tax on interest. We agree with the CTA and the Court of Appeals that Picop's tax exemption under R.801. from the time of its actual bonafideorders for equipment for commercial production. known as the Investment Incentives Act. the petitioner corporation borrowed funds from several financial institutions from June 1977 to October 1977 and paid the corresponding thirty-five (35%) transaction tax thereon in the amount of P1. whichever is earlier. Commissioner of Internal Revenue. as amended. the tax upon the untaxed portion of the interest which corresponds to a period not exceeding one year shall be paid upon accrual payment.A. 5186. pioneer enterprises shall be granted the following incentive benefits: (a) Tax Exemption. to achieve operational simplicity and effective administration in capturing the interestincome "windfall" from money market operations as a new source of revenue. 36-37) The 35% transaction tax is an income tax on interest earnings to the lenders or placers. As correctly ruled by the respondent Court of Tax Appeals: Accordingly. which in the form it existed in 1977-1978. actually. pp. In other words. the thirty-five percent (35%) transaction 5 tax is an income tax. Whatever collecting procedure is adopted does not change the nature of the tax.317. Dec. i. (2) Seventy-five per cent (75%) for the sixth through the eighth years. now Section 210 (b) of the Tax Code.. has lost none of its animating principle in parturition of amendatory Presidential Decree No. as amended. . this Court held: The petitioner's contentions deserve scant consideration. No. In the instant Petition. 137. Picop reiterates its claim that it is exempt from the payment of the transaction tax by virtue of its tax exemption under R. which granted new mines and old mines resuming operation "five (5) years complete tax exemptions. In the first place. The tax thus imposed is actually a tax on interest earnings of the lenders or placers who are actually the taxpayers in whose income is imposed. 5186. the tax is on the interest earning of the immediate and all prior lenders/placers of the money. from the date the area of investment is included in the Investment Priorities Plan to the following extent: (1) One hundred per cent (100%) for the first five years. In Western Minolco Corporation v.A.A. No. (4) Twenty per cent (20%) for the eleventh and twelfth years. 8. . Exemption from all taxes under the National Internal Revenue Code. that is. No. In addition to the incentives provided in the preceding section. read in relevant part as follows: Sec. . except income tax. does not include exemption from the thirty-five percent (35%) transaction tax. 1975 (O. Thus "the borrower withholds the tax of 35% from the interest he would have to pay the lender so that he (borrower) can pay the 35% of the interest to the Government." (Rollo." In denying the claim for refund. (Emphasis supplied) Both the CTA and the Court of Appeals sustained the assessment of transaction tax. xxxxxxxxx 4 the thirty-five (35%) transaction tax by reason of Section 79-A of C. The latter are actually the taxpayers. 1975). . we need not and do not think it necessary to discuss further the nature of the transaction tax more than to say that the incipient scheme in the issuance of Letter of Instructions No." (Citation omitted) .the petitioner who borrowed funds from several financial institutions by issuing commercial papers merely withheld the 35% transaction tax before paying to the financial institutions the interests earned by them and later remitted the same to the respondent Commissioner of Internal Revenue.The tax herein imposed shall be remitted by the borrower to the Commissioner of Internal Revenue or his Collection Agent in the municipality where such borrower has its principal place of business within five (5) working days from the issuance of the commercial paper. except income tax. 340 on November 24. (3) Fifty per cent (50%) for the ninth and tenth years. the tax cannot be a tax imposed upon the petitioner. it is a tax on the interest income of the lenders or 6 creditors.e. In the case of long term commercial paper. 1154. The 35% transaction tax is imposed on interest income from commercial papers issued in the primary money market. The tax could have been collected by a different procedure but the statute chose this method. as amended.G. pursuant to Section 210 (b) of the 1977 Tax Code. 15. .03.Incentives to a Pioneer Enterprise. and (5) Ten per cent (10%) for the thirteenth through the fifteenth year. Therefore. Western Minolco applied for refund of that amount alleging it was exempt from . the borrower is made to pay the tax. . it is a tax on income. Suffice it to state that the broad consensus of fiscal and monetary authorities is that "even if nominally.

The petitioner could have shifted the tax to the lenders or recipients of the interest.D. BONDHOLDER SHOULD DECLARE 11 INTEREST EARNING FOR INCOME TAX.D. It cannot be heard now to complain about the tax.00). Such being the case.00 in aggregate face value. However. the following statement: "ISSUER NOT SUBJECT TO TRANSACTION TAX UNDER P. PICOP is not subject to 35% transaction tax on its issues of the aforesaid bonds. In contrast. dated 6 October 1977. requested a formal ruling from the Bureau of Internal Revenue on the liability of Picop for the thirty-five percent (35%) transaction tax in respect of such bonds. 340. 1154. which trustee will act for and in behalf of the debenture bond holders as beneficiaries. and that said bonds are intended to be listed in the stock exchanges. the promissory notes involved in the instant case are short-term instruments bearing a one-year maturity period. which will place them alongside listed equity issues. issued by the CIR. 1154. Bancom Development Corporation. I have the honor to inform you that although the bonds hereinabove described are commercial papers which will be issued in the primary market. however. The petitioner admits that it is subject to income tax. 1154.D. Picop is madepersonally liable for the thirty-five percent (35%) transaction 10 tax and if it did not actually withhold thirty-five percent (35%) of the interest monies it had paid to its lenders. those bonds were not subject to the thirty-five percent (35%) transaction tax imposed by P. The managing underwriter of this debenture bond issue. xxxxxxxxx (Emphasis supplied) It is thus clear that the transaction tax is an income tax and as such. as amended. said bonds do not come within the purview of the "commercial papers" intended to be subjected to the 35% transaction tax prescribed in Presidential Decree No. that the issue will be covered by a "Trust Indenture" with a duly authorized trust corporation as required by the Securities and Exchange Commission. Picop claims that it had relied on a ruling. Plana. the bonds were moreover subordinated to present and future debts of Picop and convertible into common stock of Picop at the option of the bondholder. is not a tax contemplated in the above-quoted legal provisions. The ruling rendered by the then Acting Commissioner of Internal Revenue. It must be noted that the debenture bonds which were the subject matter of Commissioner Plana's ruling were long-term bonds maturing in ten (10) years and which could not be pre-terminated and could not be redeemed by Picop until after eight (8) years from date of issue. it is clear from the abovestated facts that said bonds will not be issued as money market instruments.000. Picop was the withholding agent. by custom and . 1975. as can be gleaned from Letter of Instruction No. although nominally categorized as a business tax. 1154. that the bonds will be issued as debentures in denominations of one thousand pesos (P1. to 9 mature in ten (10) years at 14% interest per annum payable semiannually. No. These promissory notes constitute the very archtype of money market instruments. in any event." (Emphases supplied) In the above quoted ruling. the CIR basically held that Picop's debenture bonds did not constitute "commercial papers" within the meaning of P. as implemented by Revenue Regulations No. In reply. As a withholding agent. 7-77. No. those investing in said bonds should be made aware of the fact that the transaction tax is not being imposed on the issuer of said bonds by printing or stamping thereon.000. 5186. Efren I. and considering that the purposes of Presidential Decree No. 340 is an extraneous or extrinsic aid to the construction of section 210 (b). which held that Picop was not liable for the thirty-five (35%) transaction tax in respect of debenture bonds issued by Picop. that the debenture bonds will besubordinated to present and future debts of PICOP. is not applicable in respect of the promissory notes which are the subject matter of the instant case. The above ruling. falls outside the scope of the tax exemption granted to registered pioneer enterprises by Section 8 of R. Prior to the issuance of the promissory notes involved in the instant case.00) or multiples. The transaction tax. as such. however. (See Section 2 of said Regulation) Accordingly. Picop had only itself to blame. Its tax exemption should be strictly construed. Picop had also issued debenture bonds P100. the bonds cannot be preterminated by the holder and cannot be redeemed by the issuer until after eight (8) years from date of issue.xxxxxxxxx (Emphasis supplied) 7 Much the same issue was passed upon in Marinduque Mining Industrial 8 Corporation v.000. For money market instruments are precisely. is in reality a withholding tax as positively stated in LOI No. are (a) to regulate money market transactions and (b) to ensure the collection of the tax on interest derived from money market transactions by imposing a withholding tax thereon.000. LOI No. which is a tax on interest derived from commercial paper issued in the money market. obliged to withhold thirty-five percent (35%) of the interest payable to its lenders and to remit the amounts so withheld to the Bureau of Internal Revenue ("BIR"). No. that once issued. It did not choose to do so. in bold letters. that the bonds are convertible into common stock of the issuer at the option of the bond holder at an agreed conversion price.A.000. and that. dated November 21. We hold that petitioner's claim for refund was justifiably denied. Commissioner of Internal Revenue and resolved in the same way: It is very obvious that the transaction tax. 340. 1154. stated in relevant part: It is represented that PICOP will be offering to the public primary bonds in the aggregate principal sum of one hundred million pesos (P100.

asurcharge of fifty (50%) per centum of its amount. in comprehensive terms. The amount so added to any tax shall be collected at the same time and in the same manner and as part of the tax unless the tax has been paid before the discovery of the falsity or fraud. 1154. 1154. or on 20 September 1977 . invoked by the Secretary of Finance in issuing Revenue Regulation 777. (without passing upon) the correctness of the 6 October 1977 BIR ruling. In the case of willful neglect to file the return within the period prescribed herein or in case a false or fraudulent return is willfully made. This Section needs to be quoted in extenso: . We conclude that Picop was properly held liable for the thirty-five percent (35%) transaction tax due in respect of interest payments on its money market borrowings.543. 10. however contends that even if the tax has to be paid. Section 10 of Revenue Regulation 7-77 must embody or rest upon some provision in the Tax Code itself which imposes surcharge and penalty interest for failure to make a transaction tax payment when due. Based on the Worksheet prepared by the Commissioner's office. No. and treated differently. 1154 is not. — Where the amount shown by the taxpayer to be due on its return or part of such payment is not paid on or before the date prescribed for its payment. therefore. Neither did Section 210 (b) of the 1977 Tax Code which reenacted Section 195-C inserted into the Tax Code by P. 1154.51 13 which is all PICOP should pay as transaction tax. while it purports to be open-ended. does not include the imposition of administrative or civil penalties such as the payment of amounts additional to the tax due. We find merit in this contention. However. the CIR prays that Picop be held liable for a twenty-five percent (25%) surcharge and for interest at the rate of fourteen percent (14%) per annum from the date prescribed for its payment. 326. the increment to be a part of the tax and the entire amount shall be subject to interest at the rate of fourteen (14%) per centum per annum from the date prescribed for its payment.410. No. no other effectivity date having been provided by the PD. (Emphasis supplied) P. Thirty-five (35%) per cent of this is P3. It appears that the tax was levied on interest earnings from January to October. from Picop's long-term debenture bonds. In addition to the above administrative penalties. Assuming. 1977. At the same time. to be given retroactive effect by imposing the thirty-five percent (35%) transaction tax in respect of interest earnings which accrued before the effectivity date of P. set out. With respect to the transaction tax due.D. issued by the Secretary of Finance. In so praying.Penalties.578.D. upon recommendation of the Commissioner of Internal Revenue. (Emphases supplied) The 1977 Tax Code itself. in other words. the criminal and civil penalties as provided for under Section 337 of the Tax Code of 1977 shall be imposed for violation of any provision of Presidential 15 Decree No.D. No.D. The Court of Appeals pointed out that: PICOP. (Emphasis supplied) Section 4 of the same Code contains a list of subjects or areas to be dealt with by the Secretary of Finance through the medium of an exercise of his quasi-legislative or rule-making authority. however. shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code. PD 1154 was published in the Official Gazette only on 5 September 1977.03. both in its petition before the Court of Appeals and its Petition in the instant case. This Section reads: Sec. there being nothing in the statute to suggest that the legislative authority intended to bring about such retroactive imposition of the tax. the rule-making authority of the Secretary of Finance: Sec. points to Section 51 (e) of the 1977 Tax Code as its source of authority for assessing a surcharge and penalty interest in respect of the thirty-five percent (35%) transaction tax due from Picop. in order that it may be held to be legally effective in respect of Picop in the present case. No. nor did it expressly authorize the imposition of. the amount of the tax shall be increased by twenty-five (25%) per centum.D. a surcharge and penalty interest in case of failure to pay the thirty-five percent (35%) transaction tax when due. This list. we agree with the Court of Appeals that the transaction tax may be levied only in respect of the interest earnings of Picop's money market lenders accruing after P. the interests earned from 20 September to October 1977 was P10. (2) Whether Picop is liable for interest and surcharge on unpaid transaction tax.Authority of Secretary of Finance to Promulgate Rules and Regulations. The CIR. No.usage of the financial markets. Picop's short-term promissory notes must be distinguished. and not in respect of all the 1977 interest earnings of such lenders. Thus. and became effective only fifteen (15) days after the publication. — The Secretary of Finance. 1154 went into effect. there shall be added to the tax or to the deficiency tax in case any payment has been made on the basis of such return before the discovery of the falsity or fraud. in which case the amount so added shall be collected in the same manner as the tax. in Section 326 in relation to Section 4 of the same Code. the CIR 14 relies upon Section 10 of Revenue Regulation 7-77 dated 3 June 1977. short-term instruments with a tenor of one (1) year or 12 less.224. it should be imposed only for the interests earned after 20 September 1977 when PD 1154 creating the tax became effective. 1154 did not itself impose. P. as found by the lower court.

— In case of willful neglect to file the return or list required by this Title within the time prescribed by law." It will also be seen that Section 72 of the 1977 Tax Code imposes a surcharge only in case of failure to file a return or list "required by this Title. and it is shown that the failure to file it was due to a reasonable cause. falsity. (3) Surcharge. We consider that the authority to impose what the present Tax Code calls (in Section 248) civil penalties consisting of additions to the tax due. Thus. (2) Deficiency. the present provisions regarding prescription to the contrary notwithstanding. the term "deficiency" means: (1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return. were not inserted in Title II of the 1977 Tax Code. or any interest assessed in connection therewith under paragraph (d) of this section. — Where the amount determined by the taxpayer as the tax imposed by this Title or any installment thereof. The end result is that the thirty-five percent (35%) transaction tax is not one of the taxes in respect of which Section 51 (e) authorized the imposition of surcharge and interest and Section 72 the imposition of a fraud surcharge. The grant of that authority is not lightly to be assumed to have been made to administrative officials. in language too clear to be mistaken. The state of the present law tends to reinforce our conclusion that Section 51 (c) and (e) of the 1977 Tax Code did not authorize the imposition of a surcharge and penalty interest for failure to pay the thirty-five percent (35%) transaction tax imposed under Section 210 (b) of the same Code. .e. . the present provisions regarding prescription to the contrary notwithstanding. That the maximum amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three years. or otherwise in respect of such tax. or in case a false or fraudulent return or list is wilfully made. Section 210 (b). in the same manner and as part of the tax unless the tax has been paid before the discovery of the neglect. the Commissioner of Internal Revenue shall add to the tax or to the deficiency tax. must be expressly given in the enabling statute. as surcharge of fifty per centum of the amount of such tax or deficiency tax. imposed in the 1977 Tax Code by Section 210 (b) thereof which Section is embraced in Title V on "Taxes on Business" of that Code. That the maximum amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three years. no such addition shall be made to the tax. in case any payment has been made on the basis of such return before the discovery of the falsity or fraud. when a return is voluntarily and without notice from the Commissioner or other officer filed after such time. there shall be collected as a part of the tax. of the 1977 Tax Code. xxxxxxxxx (e) Additions to the tax in case of non-payment. 51. we are compelled to adopt this conclusion.Sec. while the thirty-five percent (35%) transaction tax is in truth a tax imposed oninterest income earned by lenders or creditors purchasing commercial paper on the money market. there shall be collected in addition to the interest prescribed herein and in paragraph (d) above and as part of the tax a surcharge of five per centum of the amount of tax unpaid. . interest at the rate of fourteen per centum per annum from the date of such notice and demand until it is paid:Provided. or fraud. It is not without reluctance that we reach the above conclusion on the basis of what may well have been an inadvertent error in legislative draftsmanship. however. (Emphases supplied) It will be seen that Section 51 (c) (1) and (e) (1) and (3). — As used in this Chapter in respect of a tax imposed by this Title. Title II on "Income Tax. credited. — If any amount of tax included in the notice and demand from the Commissioner of Internal Revenue is not paid in full within thirty days after such notice and demand.Surcharges for failure to render returns and for rendering false and fraudulent returns. a type of error common enough during the period of Martial Law in our country. i. there shall be collected upon the unpaid amount as part of the tax. even to one as highly placed as the Secretary of Finance." that is to say. but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency. — (1) Tax shown on the return. (Emphases supplied) Section 72 of the 1977 Tax Code referred to in Section 51 (e) (2) above. provides: Sec. The corresponding provision in the current Tax . authorize the imposition of surcharge and interest only in respect of a " tax imposed by this Title. in which case the amount so added shall be collected in the same manner as the tax. not due to willful neglect. Nevertheless. and decreased by the amount previously abated." The thirty-five percent (35%) transaction tax is.Payment and Assessment of Income Tax. — Where a deficiency. Title II on "Income Tax. In case of any failure to make and file a return or list within the time prescribed by law or by the Commissioner or other Internal Revenue Officer. or any part of such amount or installment is not paid on or before the date prescribed for its payment. except that. the relevant provisions." that is. — (c) Definition of deficiency.. The amount so added to any tax shall be collected at the same time. interest upon such unpaid amount at the rate of fourteen per centum per annum from the date prescribed for its payment until it is paid: Provided. or any addition to the taxes provided for in Section seventy-two of this Code is not paid in full within thirty days from the date of notice and demand from the Commissioner of Internal Revenue. returned. 72. the Commissioner of Internal Revenue shall add to the tax twenty-five per centum of its amount.

. — (a) There shall be imposed.. We do not believe we can fill that legislative lacuna by judicial fiat. and this was not disputed by the CIR. except income tax" on a declining basis over a certain period of time — includes exemption from the documentary and science stamp taxes imposed under the NIRC.000. (Emphasis supplied) Tax exemptions are.e. stresses that the tax exemption under the Investment Incentives Act may be granted or recognized only to the extent that the claimant Picop was engaged in registered operations.Civil Penalties.000. — There shall be assessed and collected on any unpaid amount of tax. otherwise the purpose of the incentives would be defeated. was not an activity included in Picop's registered operations. to be sure. interest at the rate of twenty percent (20%) per annum or such higher rate as may be prescribed by regulations. Said the Court of Appeals: . to be "strictly construed. in the same manner and as part of the tax.General Provisions. reads: Title X Statutory Offenses and Penalties Chapter I Additions to the Tax Sec. amounting to P300. in the submission of the CIR. Picop stated. (3) Whether Picop is Liable for Documentary and Science Stamp Taxes. There is. The borrowing of funds from the public." The Court of Appeals took a less rigid view of the ambit of the tax exemption granted to registered pioneer enterprises. operations forming part of its 17 integrated pulp and paper project. that the proceeds of the debenture bonds were in fact utilized to finance the BOI-registered operations of Picop. The CTA adopted the view of the CIR and held that "the issuance of convertible debenture bonds [was] not synonymous [with] the manufactur[ing] operations of an 18 integrated pulp and paper mill. without any regard to the Title of the Code where provisions imposing particular taxes are textually located. One of the means it used to raise said funds was to issue debenture bonds." that is. 249. It would indeed be altogether a different matter if there is a showing that the issuance of the debenture bonds had no bearing whatsoever on the registered operations PICOP and that they were issued in connection with a totally different business undertaking of PICOP other than its registered operation. (Emphases supplied) In other words.Interest. Picop issued sometime in 1977 long-term subordinated convertible debenture bonds with an aggregate face value of P100. however. Sec. As noted earlier. Since the money raised thereby was to be used in its registered operation. Sec. i. Section 247 (a) of the current NIRC supplies what did not exist back in 1977 when Picop's liability for the thirty-five percent (35%) transaction tax became fixed. We are aware that tax exemptions must be applied strictly against the beneficiary in order to deter their abuse. 247.A. — (a) The additions to the tax or deficiency tax prescribed in this Chapter shall apply to all taxes. or xxxxxxxxx (c) the penalties imposed hereunder shall form part of the tax and the entire amount shall be subject to the interest prescribed in Section 249. fees and charges imposed in this Code. The amount so added to the tax shall be collected at the same time. they are not to be extended beyond the ordinary and reasonable intendment of the language actually used by the legislative authority in granting the exemption.— (a) In General. in addition to the tax required to be paid. . The issuance of debenture bonds is certainly conceptually distinct from pulping and paper manufacturing . PICOP should enjoy the incentives granted to it by R. was intended 16 to be given retroactive application by the legislative authority. from the date prescribed for payment until the amount is fully paid.00.000. Documentary and science stamp taxes on debenture bonds are certainly not income 19 taxes. 248. one of which is the exemption from payment of all taxes under the National Internal Revenue Code. penalty equivalent to twenty-five percent (25%) of the amount due. PICOP's explanation that the debenture bonds were issued to finance its registered operation is logical and is unrebutted. . . There is nothing to suggest that Section 247 (a) of the present Tax Code. 5186. It is claimed by Picop that its tax exemption — "exemption from all taxes under the National Internal Revenue Code. . . .Code very clearly embraces failure to pay all taxes imposed in the Tax Code. The CIR assessed documentary and science stamp taxes. which was inserted in 1985. Section 247 (a) of the NIRC. a dearth of evidence in this regard. on the issuance of Picop's debenture bonds.00. upon the other hand. It cannot be denied that PICOP needed funds for its operations. in the following cases: xxxxxxxxx (3) failure to pay the tax within the time prescribed for its payment. The CIR. . except income taxes. as amended.

(Emphasis supplied) Thus. in BIR Ruling No. printed circuit boards. for instance. Tax Code. The Commissioner said: You now request a ruling that as a preferred pioneer enterprise. 236-87) In other words. — The following may be deducted from gross income: (a) Expenses: Accordingly. said parties who are not exempt shall be the one directly liable for the tax. It remains only to note that after commencement of the present litigation before the CTA. dated 28 April 1989. the BIR took the position that the tax exemption granted by R. therefore. 173. the interest payments on those loans should have been capitalized instead and claimed as a depreciation deduction taking into account the adjusted basis of the machinery and equipment (original acquisition cost plus interest charges) over the useful life of such assets. We agree. The CIR disallowed this deduction upon the ground that. In 1969. dated 6 February 1989.Deduction from Gross Income. the CIR does not dispute that the interest payments were made by Picop on loans incurred in connection with the carrying on of the . the CIR insists on its original position. the Commissioner held that a registered pioneer enterprise producing polyester filament yarn was entitled to exemption "from the documentary stamp tax on [its] sale of real property in Makati up to December 31. 1972 and 1977. you are exempt from the payment of Documentary Stamp Tax (DST). etc. (Emphasis supplied) Similarly.operations. Pursuant to Section 46 (a) of Presidential Decree No. 111-81) However. (BIR Ruling No. no longer insists on the position it originally took in the instant case before the CTA. pioneer enterprises registered with the BOI are exempt from all taxes under the National Internal Revenue Code. amounting to P42. does include exemption from documentary stamp taxes on transactions entered into by BOI-registered enterprises. xxxxxxxxx (b) Interest: (1) In general. except from all taxes under the National Internal Revenue Code. In reply. No. from the date the area of investment is included in the Investment Priorities Plan to the following extent: xxxxxxxxx II (1) Whether Picop is entitled to deduct against current income interest payments on loans for the purchase of machinery and equipment. BIR Ruling No. In its 1977 Income Tax Return. please be informed that your request is hereby granted. your company is exempt from the payment of documentary stamp tax to the extent of the percentage aforestated on transactions connected with the registered business activity. with the Court of Appeals on this matter that the CTA and the CIR had erred in rejecting Picop's claim for exemption from stamp taxes.00. In the instant case. the general rule is that interest expenses are deductible against gross income and this certainly includes interest paid under loans incurred in 20 connection with the carrying on of the business of the taxpayer.. administratively at least. But no one contends that issuance of bonds was a principal or regular business activity of Picop. Picop obtained loans from foreign creditors in order to finance the purchase of machinery and equipment needed for its operations. as amended. . BIR Ruling No.840. We begin by noting that interest payments on loans incurred by a taxpayer (whether BOI-registered or not) are allowed by the NIRC as deductions against the taxpayer's gross income. 088.A. because the loans had been incurred for the purchase of machinery and equipment. on these loans as a deduction from its 1977 gross income. 013. . only banks or other financial institutions are in the regular business of raising money by issuing bonds or other instruments to the general public. Both the CTA and the Court of Appeals sustained the position of Picop and held that the interest deduction claimed by Picop was proper and allowable. is exempt from the payment of documentary stamp taxes." It appears clear to the Court that the CIR. magnetic heads. Section 30 of the 1977 Tax Code provided as follows: Sec. — The amount of interest paid within the taxable year on indebtedness. as amended. if said transactions conducted by you require the execution of a taxable document with other parties. Picop claimed interest payments made in 1977.131. said parties shall be liable to the same percentage corresponding to your tax exemption. 5186. 1989. held that a registered preferred pioneer enterprise engaged in the manufacture of integrated circuits. 1789. In the instant Petition. except income tax. We consider that the actual dedication of the proceeds of the bonds to the carrying out of Picop's registered operations constituted a sufficient nexus with such registered operations so as to exempt Picop from stamp taxes ordinarily imposed upon or in connection with issuance of such bonds. except on indebtedness incurred or continued to purchase or carry obligations the interest upon which is exempt from taxation as income under this Title: . (Sec. 30.

2 as amended which reads as follows: Sec. whether he would have been better off by lending out his funds and earning interest rather than investing such funds in his business. 2 as referring to so called "theoretical interest. (a) Interest on a loan (but not theoretical interest of a taxpayer 21 using his own funds).. The CIR argues finally that to allow Picop to deduct its interest payments against its gross income would be to encourage fraudulent claims to double deductions from gross income: [t]o allow a deduction of incidental expense/cost incurred in the purchase of fixed asset in the year it was incurred would invite tax . entitled "Taxes and Carrying Charges Chargeable to Capital Account and Treated as Capital Items" of the U. (Emphasis supplied) The "carrying charges" which may be capitalized under the above quoted provisions of the U." At the same time. be (b) deducted from gross income of the taxpayer." that is to say. it is provided that adjustment shall be made for all "expenditures.S. or other items" properly chargeable to a capital account. Should the taxpayer elect to deduct the interest payments against its gross income. to treat such taxes orcharges as so chargeable.S. Accordingly. The CIR has been unable to point to any provision of the 1977 Tax Code or any other Statute that requires the disallowance of the interest payments made by Picop. The truncated excerpt of the U. Internal Revenue Code. Such "theoretical" or imputed interest does notarise from a legally demandable interest-bearing obligation incurred by the taxpayer who however wishes to find out. whether improved or unimproved and whether productive or nonproductive. losses.e. The U. In other words.registered operations of Picop..S. with respect to taxes and carrying charges which the taxpayer has not elected to capitalize but for which a deduction instead has been 22 taken. Income Tax Regulations. Income Tax Regulations quoted by the CIR needs to be related to the relevant provisions of the U. the general rule that interest payments on a legally demandable loan are deductible from gross income must be applied.. i. Internal Revenue Code include. Neither does the CIR deny that such interest payments were legally due and demandable under the terms of such loans.S. will be adjusted by adding the amount of such interest payments or alternatively. are chargeable to capital account with respect to property.g. e. which provisions deal with the general topic of adjusted basis for determining allowable gain or loss on sales or exchanges of property and allowable depreciation and depletion of capital assets of the taxpayer: Present Rule. One thing that Section 79 quoted above makes clear is that interest which does constitute a charge arising under an interest-bearing obligation is an allowable deduction from gross income. (Emphases supplied) We read the above provision of Revenue Regulations No. the financing of the purchase of machinery and equipment actually used in the registered operations of Picop. if the taxpayer elects. 79. thus including taxes and carrying charges.266-1 (b). and in fact paid by Picop during the tax year 1977. the taxpayer is not entitled to both the deduction from gross income and the adjusted (increased) basis for determining gain or loss and the allowable depreciation charge. — The items thus chargeable to capital accounts are — (11) In the case of real property. which does not represent a charge arising under an interest-bearing obligation. which paragraph reads as follows: (B) Taxes and Carrying Charges. in accordance with such regulations. is not allowable deduction from gross income. receipts. We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and equipment.Interest on Capital.S. e. at the election of the taxpayer. — Interest calculated for cost-keeping or other purposes on account of capital or surplus invested in the business. as the CIR has pointed out. Internal Revenue Code does not prohibit the deduction of interest on a loan obtained for purchasing machinery and equipment against gross income. under regulations prescribed by the Secretary or his delegate. under the adjustment of basis provisions which have just been discussed. The 1977 Tax Code is simply silent on a taxpayer's right to elect one or the other tax treatment of such interest payments. unless the taxpayer has also or previously capitalized the same interest payments and thereby adjusted the cost basis of such assets. in which event such adjustment to the capital account is not made. interest on a loan "(but not theoretical interest of a taxpayer using his own funds)." What the CIR failed to point out is that such "carrying charges" may.g. however. interest " calculated" or computed (and not incurred or paid) for the purpose of determining the "opportunity cost" of investing funds in a given business. It is claimed by the CIR that Section 79 of Revenue Regulations No. an exception exists. The Internal Revenue Code. machinery and equipment. either be (a) capitalized in which case the cost basis of the capital assets. Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan. the taxpayer cannot at the same time capitalize the interest payments. 2 was "patterned after" paragraph 1. and the Regulations promulgated thereunder provide that "No deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as. The CIR invokes Section 79 of Revenue Regulations No.

So far as the records of the instant cases show.904. In claiming such deduction. 3) After BOI approval of the merger. Picop entered into a merger agreement with the Rustan Pulp and Paper Mills. to the extent engaged in a preferred area of investment. increased deductions for depreciation. after the date of the agreement of merger but before the merger became effective — relating to the deductibility of the previous losses of RPPM under Section 7 (c) of R.00 from this 25 transaction.196. (Emphasis supplied) . RPPM had over preceding years accumulated losses in the total amount of P81.891.A. Picop has not claimed to be entitled to double deduction of its 1977 interest payments. The Court will not assume that the CIR would be unable or unwilling to disallow "a double deduction" should Picop. also attempt subsequently to adjust upward the cost basis of the machinery and equipment purchased and claim. because with the merger. having deducted its interest cost from its gross income. We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picop's 1977 interest payments on its loans for capital equipment against its gross income for 1977. signed by BOI Governor Cesar Lanuza. It appears that RPPM and RMC were. The entire subscribed and outstanding capital stock of RPPM and RMC would be exchanged for 2.848 shares of preferred stock of Picop (with a par value of P10. Thereupon.240. On 18 January 1977. to be issued by Picop. even before the effective date of merger. however.824. In this case. 7.340.00.Incentives to Registered Enterprise.034 shares of preferred stock (with a par value of P10. assigned and conveyed to Picop as the surviving corporation. The merger agreement was approved in 1977 by the creditors and stockholders of Picop. and reported a gain of P9. 5186 as amended.106. PICOP can no longer apply for the registration of the registered capacity of Rustan because with the approved merger. the rights. Inc. Picop paid off the obligations of RPPM to the Development Bank of the Philippines ("DBP") in the amount of P68.A.. In addition.00. No. shall be granted the following incentive benefits: xxxxxxxxx (c) Net Operating Loss Carry-over. — A net operating loss incurred in any of the first ten years of operations may be carried over as a deduction from taxable income for the six years immediately following the year of such loss. ("RPPM") and Rustan Manufacturing Corporation ("RMC").00 of RPPM's accumulated losses as a deduction 24 against Picop's 1977 gross income. No. properties. Inc. privileges. Immediately before merger effective date.evasion through fraudulent application of double deductions from 23 gross income. except that income not taxable either in whole or in part under this or other laws shall be included in gross income.849.g.00.00) and 149.900. Upon the other hand. the previous losses of Rustan may be carried over by PICOP. by issuing 6. RPPM and RMC and by the Securities and Exchange Commission. In its 1977 Income Tax Return.000.00) to the DBP. such registered capacity of Rustan transferred to PICOP will have the same registration date as that of Rustan.476 fully paid up Class "A" common stock of Picop (with a par value of P10. 5186 which provides as follows: Sec. powers and franchises of RPPM and RMC were to be transferred. and any portion of such loss which exceeds the taxable income of such first year shall be deducted in like manner from the taxable income of the next remaining five years. (2) Whether Picop is entitled to deduct against current income net operating losses incurred by Rustan Pulp and Paper Mills.294. Picop claimed P44. The net operating loss shall be computed in accordance with the provisions of the National Internal Revenue Code. the result being that Picop would wholly own both RPPM and RMC while the stockholders of RPPM and RMC would join the ranks of Picop's shareholders.00). RPPM and RMC were dissolved. PICOP assumes all the rights and obligations of Rustan subject. BOI-registered companies. The entire amount of the loss shall be carried over to the first of the six taxable years following the loss. The CIR has neither alleged nor proved that Picop had previously adjusted its cost basis for the machinery and equipment purchased with the loan proceeds by capitalizing the interest payments here involved. on 30 August 1977. The pertinent portions of this BOI opinion. Under this agreement.159. read as follows: 2) PICOP will not be allowed to carry over the losses of Rustan prior to the legal dissolution of the latter because at that time the two (2) companies still had separate legal personalities . any provision of this Act to the contrary notwithstanding. (Emphasis supplied) Picop had secured a letter-opinion from the BOI dated 21 February 1977 — that is. Picop relies on section 7 (c) of R. Picop sold all the outstanding shares of RMC stock to San Miguel Corporation for the sum of P38. — A registered enterprise. (Emphases supplied) The Court is not persuaded. on 30 November 1977. to the period prescribed for carrying over of such 26 losses. The Board of Investments approved the merger agreement on 12 January 1978. e. like Picop. apparently the effective date of merger.

Law of Federal Income 28 Taxation. 29. Said section provides: xxxxxxxxx With this benefit in mind. The purpose of the merger was to rationalize the container board industry and not to take advantage of the net losses incurred by RPPMI prior to the stock swap. 38-43. and the previous losses of Rustan may be carried over by PICOP by operation of law. xxxxxxxxx . (Emphasis supplied) The size of RPPM's accumulated losses as of the date of the merger — more than P81. both in 1977 and at present. Thus. No. under Section 7 (c) of R. that the deduction availed of under Section 7(c) of R. concluded that since RPPM was dissolved on 30 November 1977. the registered capacity of Rustan shall be transferred to PICOP. there shall be allowed as deduction — xxxxxxxxx (d) Losses: (1) By Individuals.Curiously enough. Under our Tax Code. Furthermore. Picop chose to rely solely on the BOI letter-opinion. 103]. Thus. especially in respect of its view of what the U. The CIR disallowed all the deductions claimed on the basis of RPPM's losses. its accumulated losses were appropriately carried over by Picop in the latter's 1977 Income Tax Return "because by that time RPPMI and Picop were no longer separate 31 and different taxpayers. and not by Picop in connection with Picop's own registered operations. we must note that the CTA in fact overlooked the statement made by petitioner's counsel before the CTA that: Among the attractions of the merger to Picop was the accumulated net operating loss carry-over of RMC that it might possibly use to relieve it (Picop) from its income taxes. the ordinary rule — that is. Picop on the one hand and RPPM and RMC on the other. Sec. the corporation thereafter entering into a trade or business different from that in which it was previously engaged. — In the case of an individual. 20070) (Emphasis supplied) In respect of the above underscored portion of the CTA decision. The CTA upheld the deduction claimed by Picop. tax law was on this matter. 5186 shall be available only to the extent in which they are engaged in registered operations. The CIR took the view that Picop. No. RPPM and RMC were merged into one (1) corporate personality only on 12 January 1978. losses may be deducted from gross income only if such losses were actually sustained in the same year that they are deducted or charged off. 5186.000. losses actually sustained during the taxable yearand not compensated for by an insurance or otherwise — (A) If incurred in trade or business. p. Picop did not also seek a ruling on this matter. The CTA said: Respondent further averred that the incentives granted under Section 7 of R. Mertens. the CIR alleged that these losses had been incurred by RPPM "from the borrowing of funds" and not from carrying out of RPPM's registered operations. [BOI ruling dated February 21. 30. Picop addressed three (3) questions to the BOI in a letter dated November 25. upon approval of the merger agreement by the BOI.A. J-1)] It is clear therefrom.Deductions from Gross Income. It is important to note at the outset that in our jurisdiction." RPPM. however.S." (pp. [IRC (1954). the previous losses were incurred by " another taxpayer. 5186 was only 29 proper. is less than crystal clear. Rollo of SP No. when stock of a corporation is purchased in order to take advantage of the corporation's net operating loss incurred in years prior to the purchase. much like the CTA. Section 30 of the 1977 Tax Code provides: Sec. — In computing net income. We disagree with respondent. The Court of Appeals. The Court of Appeals followed the result reached by the CTA.00 — must have constituted a powerful attraction indeed for Picop. the net operating loss carry-over may be entirely lost. still had their separate juridical personalities. R. Firstly. Chap. from the Bureau of Internal Revenue.5186.A. No. apparently on two (2) grounds. 1977 directly answering the three (3) 30 queries. 1976. clearly a matter of tax law. Vol. once the BOI approved the merger agreement. 1977 (Exh. In any event. the CTA apparently fell back on the BOI opinion of 21 February 1977 referred to above.A. Secondly. citing Section 1 of Rule IX of the Basic Rules and Regulations to Implement the Intent and Provisions of the Investment Incentives Act. the rule applicable in respect of corporations not registered with the BOI as a preferred pioneer enterprise — is that net operating losses cannot be carried over.000. the Court is unable to agree with the CTA and Court of Appeals on the deductibility of RPPM's accumulated losses against Picop's 1977 gross income. 382(a).A. The BOI replied on February 21. We 27 focus on the first ground. its reasoning. during the taxable year 1977.11a. 5." After prolonged consideration and analysis of this matter.

in fact gave up the struggle and went out of existence and its former stockholders joined the much larger group of Picop's stockholders. In granting the extraordinary privilege and incentive of a net operating loss carry-over to BOI-registered pioneer enterprises. A taxpayer has the right to deduct all authorized allowances and it follows that if he does not within any year deduct certain of his expenses. and outside the special realm of BOIregistered enterprises. 5186. Both the CTA and the Court of Appeals appeared much impressed not only with corporate technicalities but also with the U. To grant Picop's claimed deduction would be to permit Picop to shelter its otherwise taxable income (an objective which Picop had from the very beginning) which had not been earned by the registered enterprise which had suffered the accumulated losses. tax law on this matter.(2) By Corporations. In effect. such losses may be charged off only against income earned in the same taxable year when the losses were incurred. Picop's claim for deduction is not only bereft of statutory basis. In our jurisdiction. as amended) is even more explicit and detailed: Sec. Conversely.106. 5186 introduced the carry-over of net operating losses as a very special incentive to be granted only to registered pioneer enterprises and only with respect to their registered operations. No. losses. 5186. upon the arrival of the effective date of merger. No. 5186 which either requires or permits such a result. simply to note that in U. The expenses. No. losses must be deducted against current income in the taxable year when such losses were incurred. RPPM far from benefiting from the tax incentive granted by the BOI statute. We consider and so hold that there is nothing in Section 7 (c) of R. it does violence to the legislative intent which animates the tax incentive granted by Section 7 (c) of R. so far as practicable. Thus it is that R. xxxxxxxxx .A. Under the CTA and Court of Appeals decisions. he may renderan amended return for such preceding taxable year including such amount of loss in the deduction from gross income and may in proper cases file a claim for refund of the excess paid by reason of the failure to deduct such loss in the original return . — In the case of a non-resident alien individual or a foreign corporation. In the instant case. . . save for Section 7 (c) of .S. . RPPM. . he can not deduct them from the income of the next or any succeeding year.A. To the contrary. No. To promote its economic development goals. — Each year's return. the Republic foregoes or defers taxing the income of the pioneer enterprise until after that enterprise has recovered or offset its earlier losses. If subsequent to its occurrence. or deficit of one year cannot be used to reduce the income of a subsequent year. liabilities. both as to gross income and deductions therefrom should be complete in itself. there is no such thing as a carry-over of net operating loss. . We consider that this circumstance relates much more to form than to substance. taxes.A. . interests. the losses deductible are those actually sustained during the year incurred in business or trade conducted within the Philippines. It should suffice. The statutory purpose here may be seen to be the encouragement of the establishment and continued operation of pioneer industries by allowing the registered enterprise to accumulate its operating losses which may be expected during the early years of the enterprise and to permit the enterprise to offset such losses against income earned by it in later years after successful establishment and regular operations. Picop would benefit by immunizing P44. Moreover.S. 76. (3) By Non-resident Aliens or Foreign Corporations. eventually generated by the same registered operations which earlier had sustained losses.When charges are deductible. 2. A loss from theft or embezzlement occurring in one year and discovered in another is ordinarily deductible for the year in which sustained. The losses suffered by RPPM's registered operations and the gross income generated by Picop's own registered operations now came under one and the same corporate roof. the income that would be shielded from taxation is not income that was. all losses actually sustained and charged off within the taxable year and not compensated for by insurance or otherwise. however.A. 32 . (Emphases supplied) It is thus clear that under our law. a taxpayer first ascertains the amount of a loss sustained during a prior taxable year which has not been deducted from gross income. . the availability to companies generally of operating loss carry-overs and of operating loss carry-backs is expressly provided 33 and regulated in great detail by statute. that result makes non-sense of the legislative purpose which may be seen clearly to be projected by Section 7 (c). but had merely purchased another's losses. to benefit from the operating losses accumulated by another corporation or enterprise. Picop. Indeed. Picop. to allow the deduction claimed by Picop would be to permit one corporation or enterprise. (Emphasis supplied) Section 76 of the Philippine Income Tax Regulations (Revenue Regulation No. after much effort. or other charges. R. remained. The CTA and the Court of Appeals allowed the offsetting of RPPM's accumulated operating losses against Picop's 1977 gross income.00 of its income from taxation thereof although Picop had not run the risks and incurred the losses which had been encountered and suffered by RPPM. basically because towards the end of the taxable year 1977.196. . only one (1) corporation. We do not believe that that single purely technical factor is enough to authorize and justify the deduction claimed by Picop. — In a case of a corporation. however. and taxpayers are expected to make every reasonable effort to ascertain the facts necessary to make a correct return. We consider that the statutory purpose can be served only if the accumulated operating losses are carried over and charged off against income subsequently earned and accumulated by the same enterprise engaged in the same registered operations . tax law. the legislature could not have intended to require the Republic to forego tax revenues in order to benefit a corporation which had run no risks and suffered no losses. to grant Picop's claimed deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses.

00 and. our tax law expressly rejects the very notion of loss carry-overs and carry-backs. while the cash vouchers. The CTA said: No records are available to support the abovementioned expenses .00 ——————— .421. however. Thereupon. In its assessment for deficiency income tax for 1977. cash vouchers can only confirm the fact of disbursement but not 37 necessarily the purpose thereof. The CIR disallowed this claimed deduction upon the ground of insufficiency of evidence. III (1) Whether Picop had understated its sales and overstated its cost of sales for 1977. assuming they had existed before. Picop also claimed a deduction in the amount of P1.00. The 1977 Income Tax Return of Picop set forth the following figures: Sales (per Picop's Income Tax Return): Paper P 537. A 36 taxpayer has the burden of proving entitlement to a claimed deduction. these vouchers standing alone cannot prove that the payments made were for the accrued expenses in question. PICOP should have presented. are not said to provide the necessary details regarding the nature and purpose of the expenses reflected therein. In its Income Tax Return for 1977.391.R.132. No.656.00 Timber P 263. (Emphasis supplied) We must support the CTA and the Court of Appeals in their foregoing rulings. (3) Whether Picop is entitled to deduct against current income certain claimed financial guarantee expenses. which we do not find on file. Picop not only failed to present such documents. This deduction is said to relate to chattel and real estate mortgages required from Picop by the Philippine National Bank ("PNB") and DBP as guarantors of loans incurred by Picop from foreign creditors. if any.644.00 as financial guarantee expenses. According to Picop. through the guarantors. The testimony of petitioner's witness that the official receipts and cash vouchers were shown to the Bureau of Internal Revenue will not suffice if no records could be presented in 34 court for proper marking and identification. even Picop's own vouchers were not submitted in evidence and the BIR Examiners denied that such vouchers and other documents had been exhibited to them. Without the supporting papers such as the invoices or official receipts of the Register of Deeds. In support of this claimed deduction.158. as already noted. The vouchers merely showed that the amounts were paid to the Register of Deeds and simply cash account. Indeed. The best evidence of payment is the official receipts issued by the Register of Deeds. Picop allegedly showed its own vouchers to BIR Examiners to prove disbursements to the Register of Deeds of Tandag. therefore.421.237. Surigaodel Sur.A. the CIR claimed that Picop had understated its sales by P2. of particular amounts. overstated its cost of sales by P604.018.00 in its 1977 Income Tax Return must be disallowed.00 was not adequately shown and that such deduction must be disallowed. We conclude that the deduction claimed by Picop in the amount of P44. the testimony of Picop's employee was inadmissible and was in any case entitled to very little. no statute recognizes or permits loss carry-overs and loss carrybacks. This disallowance was sustained by the CTA and the Court of Appeals. its owner's copy of the registered titles with the lien inscribed thereon as well as an official receipt from the Register of 35 Deeds evidencing payment of the registration fee.196.106. The best evidence that Picop should have presented to support its claimed deduction were the invoices and official receipts issued by the Register of Deeds. Under the 39 best evidence rule.237. the claimed deduction represents registration fees and other expenses incidental to registration of mortgages in favor of DBP and PNB. Emphasis supplied) The Court of Appeals added: The mere testimony of a witness for PICOP and the cash vouchers do not suffice to establish its claim that registration fees were paid to the Register of Deeds for the registration of real estate and chattel mortgages in favor of Development Bank of the Philippines and the Philippine National Bank as guarantors of PICOP's loans. Picop did not submit in evidence such vouchers and instead presented one of its employees to testify that the amount claimed had been disbursed for the registration of chattel and real estate mortgages. The witness could very well have been merely repeating what he was instructed to say regardless of the truth. 5186. In the proceedings before the CTA. the CIR added back both sums to Picop's net income figure per its own return. it 38 also failed to explain the loss thereof. In the instant case. We consider that entitlement to Picop's claimed deduction of P1. Moreover. credence.719. upon the other hand.

Picop attempted to explain away the failure of its Books of Accounts to reflect the same adjustments (no correcting entries. That pre-determined rate was decided upon at the beginning of the year and continued to be used throughout the year. These corrections did not result in realization of income and should not give rise to any deficiency tax. that the adjustment discussed in the testimony of the witness.851. xxxxxxxxx What are the facts of this case on this matter? Why were adjustments necessary at the year-end? Because of PICOP's procedure of recording its export sales (reckoned in U. That explanation is perhaps best presented in Picop's own words as set forth in its Memorandum before this Court: .018. the external auditors made an examination. Picop offered no evidence in respect of these assumptions. Perhaps more importantly.00 ============ Picop did not deny the existence of the above noted discrepancies. . regardless of the actual exchange rate and without waiting when the actual proceeds are received. pp. dollars) on the basis of a fixed rate. What exchange rate was used by the auditors to convert these actual dollar proceeds into Philippine pesos? They used the average of the differences between (a) the recorded fixed exchange rate and (b) the exchange rate at the time the proceeds were actually received.00 ——————— Discrepancy P 604. It was this rate at time of receipt of the proceeds that determined the amount of pesos credited by the Central Bank (through the agent banks) in favor of PICOP. In other words. In that examination.00 Cost of Sales (per Books of Accounts) P606. amounting to: P2.084. no explanation why and how a "pre-determined fixed exchange rate" was chosen at the beginning of the year and maintained throughout. unfortunately. At the end of the year.776.00 ============ The above figures thus show a discrepancy between the sales figures reflected in Picop's Books of Accounts and the sales figures reported in its 1977 Income Tax Return. dollars (or other foreign exchange) were received. PICOP recorded its export sales at a pre-determined fixed exchange rate.00.n. then the peso figures could have been simply added up to reflect the actual peso value of Picop's export sales.Total Sales P 800.549.00 ——————— Total Sales P 803. the auditors determined with accuracy the actual dollar proceeds of the export sales received. apparently) simply by quoting a passage from a case where this Court refused to ascribe much probative 41 value to the Books of Accounts of a corporate taxpayer in a tax case. The CIR also contended that Picop's cost of sales set out in its 1977 Income Tax Return.00 ============ Upon the other hand. What appears .S.206. In the proceedings before the CTA.391.814. raises more questions than it resolves. Picop presented one of its officials to explain the foregoing discrepancies. Oct.066.246.. Firstly. (T. It also assumes that the expenses summed up as "cost of sales" were all dollar expenses and that no peso expenses had been incurred. the explanation assumes that all of Picop's sales were export sales for which U. Picop was unable to explain why its Books of Accounts did not pick up the same adjustments that Picop's External Auditors were alleged to have made for purposes of Picop's Income Tax Return. at least to the mind of the Court.642.00 Timber P 265. had all such dollar proceeds been converted into pesos.644. represent the best and most objective method of determining in pesos the amount of the correct and actual export sales during the year.s. Picop's explanation further assumes that a substantial part of Picop's dollar proceeds for its export sales were not actually surrendered to the domestic banking system and seasonably converted into pesos. . was overstated: Cost of Sales (per Income Tax Return) P607. 20-25) The above explanation. It was this correct and actual export sales and costs of sales that were reflected in the income tax return and in the audited financial statements. when compared with the cost figures in its Books of Accounts. 17/85.719. These accumulated differences were averaged by the external auditors and this was what was used at the year-end for income tax and other government-report 40 purposes.S. Picop's Books of Accounts reflected higher sales figures: Sales (per Picop's Books of Accounts): Paper P 537.656.495. day to day and month to month.

6.75. among other things.367.00. It is clear to this Court that the testimonial evidence submitted by Picop fell far short of demonstrating the correctness of its explanation. Picop did not submit in evidence the aggregate amount of its U. Since this five percent (5%) corporate development tax is an income tax. The five percent (5%) corporate development tax is an additional corporate income tax imposed in Section 24 (e) of the 1977 Tax Code which reads in relevant part as follows: (e) Corporate development tax.00. in case of a domestic corporation. For Picop's Books of Accounts precisely show higher sales figures and lower cost of sales figures than Picop's Income Tax Return. the CIR has made out at least a prima facie case that Picop had understated its sales and overstated its cost of sales as set out in its Income Tax Return.106. . The additional corporate income tax imposed in this subsection shall be collected and paid at the same time and in the same manner as the tax imposed in subsection (a) of this section. is that its Books of Accounts.131.018. (8) Picop is liable for the corporate development tax of five percent (5%) of its adjusted net income for 1977 in the amount of P2.75. (2) Whether Picop is liable for the corporate development tax of five percent (5%) of its income for 1977.434. reflect what may be deemed to be admissions against interest in the instant case.578.687.A. (3) Picop is exempt from payment of documentary and science stamp taxes in the amount of P300.00 is disallowed for failure adequately to prove such expenses.000. dollar proceeds. That this additional tax shall be imposed only if the net income exceeds 10 per cent of the net worth. or net assets in the Philippines in case of a resident foreign corporation: . as already noted. (5) Picop's claimed deduction in the amount of P44.00 and overstated its cost of sales by P604. (2) Picop is not liable for interest and surcharge on unpaid transaction tax. the Court is compelled to hold Picop liable for deficiency income tax for the year 1977 computed as follows: Deficiency Income Tax . Picop must be held liable for the five percent (5%) corporate development tax in the amount of P2. is P48. we must affirm the findings of the Court of Appeals and the CTA.421.391. however. 5. .00 for interest payments on loans for.196. as will be seen below. 5186.644. for 1977.528. (7) Picop has understated its sales by P2.355. Since its adjusted net income for 1977 thus exceeded ten percent (10%) of its net worth. It is insisted by Picop that its Auditors' adjustments simply present the "best and most 42 objective" method of reflecting in pesos the "correct and ACTUAL export sales" and that the adjustments or "corrections" "did not result in realization of [additional] income and should not give rise to any deficiency tax. the term "net worth" means the stockholders' equity represented by the excess of the total assets over liabilities as reflected in the corporation's balance sheet provided such balance sheet has been prepared in accordance with generally accepted accounting principles employed in keeping the 43 books of the corporation. which are kept by its own employees and are prepared under its control and supervision. Considering conclusions nos. (6) Picop's claimed deduction for certain financial guarantee expenses in the amount P1. — In addition to the tax imposed in subsection (a) of this section.00 and the compromise penalty of P300.S.840. (4) Picop is entitled to its claimed deduction of P42.237.00.00 for the operating losses previously incurred by RPPM. they embody what must appear to be admissions against Picop's own interest.S.367.to have eluded Picop. neither did it show the Philippine pesos it had actually received or been credited for such U. Upon the other hand. No. we hold: (1) Picop is liable for the thirty-five percent (35%) transaction tax in the amount of P3. . 4.434. dollar proceeds of its export sales.543. 7 and 8.00. So far as the record of this case shows. is disallowed for lack of merit. Picop is not exempted from it under the provisions of Section 8 (a) of R. Recapitulating. Provided. an additional tax in an amount equivalent to 5 per cent of the same taxable net income shall be paid by a domestic or a resident foreign corporation. the purchase of machinery and equipment. For purposes of determining whether the net income of a corporation exceeds ten percent (10%) of its net worth." The correctness of this contention is not self-evident. Its net worth figure or total stockholders' equity as reflected in its Audited Financial Statements for 1977 is P464. The adjusted net income of Picop for 1977. Accordingly.51.749. For the CIR has a right to assume that Picop's Books of Accounts speak the truth in this case since.

610.15 Add: Fourteen percent (14%) interest from 15 April 1978 to 14 April 1981 46 45 P 949.644.00 (4) Overstatement of Cost of Sales P 604.729.106.00 Add: Unallowable Deductions (1) Deduction of net operating losses incurred by RPPM P 44.80 Fourteen percent (14%) interest from 21 April 1983 to 20 April 1986 P 17.00 =========== Income Tax Due Thereon Less: Tax Already Assessed per Return 80.Net Income Per Return P 258.391.00 (3) Understatement of Sales P 2.216.215.312.994.00 —————— Total P 48.367.51 itemized as follows: (1) Thirty-five percent (35%) transaction tax P 3.709.00 =========== Add: Five percent (5%) surcharge —————— Total Deficiency Income Tax with surcharge P 19.00 (2) Unexplained financial guarantee expenses P 1.237.166.543.358.252.00 —————— Net Income as Adjusted P 48.787.421.00 —————— Total Deficiency Income Tax Due and Payable P 40.583.030.894.574.794.687.560.018.189.51 47 P 11.376.00 =========== WHEREFORE.00 44 Total Deficiency Income Tax P 18.00 .434. for all the foregoing.944.355.00 Add: Five percent (5%) Corporate Development Tax P 2.429.00 —————— Deficiency Income Tax P 16. the Decision of the Court of Appeals is hereby MODIFIED and Picop is hereby ORDERED to pay the CIR the aggregate amount of P43.196.578.15 P 8.

794.252.(2) Total Deficiency Income Tax Due 40.709. SO ORDERED.51 ============ No pronouncement as to costs.00 ——————— Aggregate Amount Due and Payable P 43.215. .

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