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142299, June 22, 2006; Azcuna, J.

vs. The SC is not convinced with either of the two interpretations advances.
G.R. No. The SC ruled that the entity granting the discount is entitled to claim


Petitioner claimed the 20% discount granted to senior citizens as

a deduction from its gross income thereby giving it a tax relief
equivalent to 35% (corporate income tax rate) of the deduction. Later if
filed a claim for refund of overpaid income tax due to the error in
computation of its tax liability maintaining the position that the
discounts should have been treated pursuant to R.A. No. 7432.
The CTA ordered the refund but on lesser amount. The CTA made a
recomputation of the income tax liability of the petitioner by allowing as
tax credit the cost of the discount only which is computed by getting
the percentage of cost of sales to total sales and multiplying it with total
discounts granted. This ruling was affirmed by the CA.
Issues: What is the amount allowed as tax credit? b) Can the discount
be claimed by the taxpayer as a tax refund?
Reading of the provisions of Section 4(a) of R.A. No. 7432, is as follows:

the entire amount of discount. The cost referred to in Section 4(a) of

R.A. No. 7432 refers to the amount of the 20% discount extended to
senior citizens in their purchase of medicines. This amount shall be
applied as a tax credit, and may be deducted from the tax liability of the
entity concerned. If there is no current tax due, of the establishment
reports a net loss for the period, the credit may be carried over to the
succeeding taxable year. (CIR vs. Central Drug Corp. April 15, 2005, 456
SCRA 414)

Anent the second issue, the SC ruled that the remedy of refund is not
available. The law expressly provides that the discount given to senior
citizens may be claimed as a tax credit, and not a refund. Thus, where
the words of a statute are clear, plain and free from ambiguity, it must
be given its literal meaning and applied without attempted
interpretation. (Fianza vs. Peoples Law Enforcement Board, G.R. No.
109638, March 31, 1995, 243 SCRA 165). Accordingly, the SC directed
Sec. 4. Privilege for the Senior Citizens The senior citizens shall be entitled to
issuance of tax credit certificates to petitioner instead of the refund
the following:
prayed for.
The grant of twenty percent (20%) discount from all establishments relative to
utilization of transportation services, hotels and similar lodging establishments,
restaurants and recreations centers and purchase of medicines anywhere in the
country: Provided, That private establishments may claim the cost as tax credit.

This bring us to the issue of whether what is being asked to be refunded

is the discount or the overpaid income tax. Which is to be applied first
in paying the income tax liability of the petitioner, the tax credit or the
amount of money tendered? It must be born in mind that there was an
overpayment of the tax because of the re-computation that was made,
treating this time the discount as tax credit instead of treating of it as
deduction from gross income. The amount of the tax credit however, is
not sufficient to offset petitioners income tax hence, a substantial
amount was also paid for the years covered. Were it not for wrong
treatment of the discount, there could have been no overpayment made.
Will the overpayment not constitute an erroneously paid tax thereby
giving the taxpayer the right to file a claim for refund under Section 204
and 229 of the NIRC?

The term cost when applied to the discounts granted, is susceptible to

various interpretations. The BIR by virtue of RR No. 2-94 interpreted it
to mean the tax cost which is the very reason why it was treated as a
deduction from gross income. The economic effect of this treatment is
the same as allowing 35% (tax cost) of the discount as tax credit.
The CTA, on the other hand, interpreted it to be the cost of the goods
sold corresponding to the discounts to the extent that they could have
increased the sales if no discounts were granted. Said in another way,
were it not for the discounts there could have been additional sales in
the same amount as the discounts, so the cost is the cost of goods sold
corresponding to these additional sales were it not for the discount. The
CTA, in determining the amount allowed as a tax credit, came out with
Another important point in this case is if the discount is not
this formula, viz:
Total Cost of Goods Sold
xTotal discounts granted
Cost of allowed to be refunded but it is allowed to be refunded but it is allowed
to be granted as a tax credit certificate, as in this case, then there
seems to be a circumvention of the rule laid down in Central Drug
Total Sales
(2005). This is because a tax credit certificate can not be used for

payment of other tax liabilities or at the option of the owner can sale the
same. Will his not be equivalent to the grant of cold cash to the taxpayer
and therefore the effect is the same as that of a refund. What is not
allowed directly should not be allowed indirectly. Or it might be that the
SC is of the impression that tax credit certificate issued will only be
used for future income tax liability which seems to be the inclination in
the succeeding case.

Carlos Superdrug Corp. v. DSWD, 526 SCRA 130 (2007)

Facts: Petitioners are domestic corporations and proprietors
operating drugstores in the Philippines. Petitioners assail the
constitutionality of Section 4(a) of RA 9257, otherwise known as
the Expanded Senior Citizens Act of 2003. Section 4(a) of RA
9257 grants twenty percent (20%) discount as privileges for the
Senior Citizens. Petitioner contends that said law is
unconstitutional because it constitutes deprivation of private
Issue: Whether or not RA 9257 is unconstitutional
Held: Petition is dismissed. The law is a legitimate exercise of
police power which, similar to the power of eminent domain, has
general welfare for its object.
Accordingly, it has been described as the most essential,
insistent and the least limitable of powers, extending as it does to
all the great public needs. It is the power vested in the legislature
by the constitution to make, ordain, and establish all manner of
wholesome and reasonable laws, statutes, and ordinances, either
with penalties or without, not repugnant to the constitution, as
they shall judge to be for the good and welfare of the
commonwealth, and of the subjects of the same.
For this reason, when the conditions so demand as determined by
the legislature, property rights must bow to the primacy of police
power because property rights, though sheltered by due process,
must yield to general welfare.

Respondent corporation General Foods (Phils), which is engaged

in the manufacture of Tang, Calumet and Kool-Aid, filed its
income tax return for the fiscal year ending February 1985 and
claimed as deduction, among other business expenses,
P9,461,246 for media advertising for Tang.
The Commissioner disallowed 50% of the deduction claimed and
assessed deficiency income taxes of P2,635,141.42 against
General Foods, prompting the latter to file an MR which was
General Foods later on filed a petition for review at CA, which
reversed and set aside an earlier decision by CTA dismissing the
companys appeal.
W/N the subject media advertising expense for Tang was
ordinary and necessary expense fully deductible under the NIRC
No. Tax exemptions must be construed in stricissimi juris against
the taxpayer and liberally in favor of the taxing authority, and he
who claims an exemption must be able to justify his claim by the
clearest grant of organic or statute law. Deductions for income
taxes partake of the nature of tax exemptions; hence, if tax
exemptions are strictly construed, then deductions must also be
strictly construed.
To be deductible from gross income, the subject advertising
expense must comply with the following requisites: (a) the
expense must be ordinary and necessary; (b) it must have been
paid or incurred during the taxable year; (c) it must have been
paid or incurred in carrying on the trade or business of the
taxpayer; and (d) it must be supported by receipts, records or
other pertinent papers.
While the subject advertising expense was paid or incurred
within the corresponding taxable year and was incurred in
carrying on a trade or business, hence necessary, the parties
views conflict as to whether or not it was ordinary. To be
deductible, an advertising expense should not only be necessary
but also ordinary.

The Commissioner maintains that the subject advertising

expense was not ordinary on the ground that it failed the two
conditions set by U.S. jurisprudence: first, reasonableness of
the amount incurred and second, the amount incurred must not
be a capital outlay to create goodwill for the product and/or
private respondents business. Otherwise, the expense must be
considered a capital expenditure to be spread out over a
reasonable time.
There is yet to be a clear-cut criteria or fixed test for determining
the reasonableness of an advertising expense. There being no
hard and fast rule on the matter, the right to a deduction
depends on a number of factors such as but not limited to: the
type and size of business in which the taxpayer is engaged; the
volume and amount of its net earnings; the nature of the
expenditure itself; the intention of the taxpayer and the general
economic conditions. It is the interplay of these, among other
factors and properly weighed, that will yield a proper evaluation.
The Court finds the subject expense for the advertisement of a
single product to be inordinately large. Therefore, even if it is
necessary, it cannot be considered an ordinary expense
deductible under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate
the current sale of merchandise or use of services and (2)
advertising designed to stimulate the future sale of merchandise
or use of services. The second type involves expenditures
incurred, in whole or in part, to create or maintain some form of
goodwill for the taxpayers trade or business or for the industry or
profession of which the taxpayer is a member. If the expenditures
are for the advertising of the first kind, then, except as to the
question of the reasonableness of amount, there is no doubt such
expenditures are deductible as business expenses. If, however,
the expenditures are for advertising of the second kind, then
normally they should be spread out over a reasonable period of
The companys media advertising expense for the promotion of a
single product is doubtlessly unreasonable considering it

comprises almost one-half of the companys entire claim for

marketing expenses for that year under review. Petition granted,
judgment reversed and set aside.
C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue
Hoskins, a domestic corporation engaged in the real estate
business as broker, managing agents and administrators, filed its
income tax return (ITR) showing a net income of P92,540.25 and
a tax liability of P18,508 which it paid.
CIR disallowed 4 items of deductions in the ITR. Court of Tax
Appeals upheld the disallowance of an item which was paid to Mr.
C. Hoskins representing 50% of supervision fees earned and set
aside the disallowance of the other 3 items.
Whether or not the disallowance of the 4 items were proper.
NOT deductible. It did not pass the test of reasonableness which
General rule, bonuses to employees made in good faith and as
additional compensation for services actually rendered by the
employees are deductible, provided such payments, when added
to the salaries do not exceed the compensation for services
The conditions precedent to the deduction of bonuses to
employees are:

Payment of bonuses is in fact compensation

Must be for personal services actually rendered

Bonuses when added to salaries are reasonable when

measured by the amount and quality of services performed with
relation to the business of the particular taxpayer.
There is no fixed test for determining the reasonableness of a
given bonus as compensation. This depends upon many factors.

In the case, Hoskins fails to pass the test. CTA was correct in
holding that the payment of the company to Mr. Hoskins of the
sum P99,977.91 as 50% share of supervision fees received by the
company was inordinately large and could not be treated as an
ordinary and necessary expenses allowed for deduction.
ISSUE: WON the supervision and collection fees received by a real
estate broker are deductiblefrom its gross compensation HELD:
No. With respect to the collection fees, the services rendered by
Hoskins in collectingthe amounts due on the sales of lots on the
installment plan are incidental to its brokerageservice in selling
the lots. If the broker's commissions on the cash sales of lots are

subject to thebrokerage percentage tax, its commissions on

installment sales should likewise be taxable. Asto the supervision
fees for the development and management of the subdivisions,
which feeswere paid out of the proceeds of the sales of the
subdivision lots, they, too, are subject to thereal estate broker's
percentage tax. The development, management and supervision
serviceswere necessary to bring about the sales of the lots and
were inseparably linked thereto. Hence,there is
basis for
holding that the operation of
subdivisions is really
incidental to the mainbusiness of the broker, which is the sale
of the lots on commission