THIRD DIVISION

COMMISSIONER OF INTERNAL
REVENUE,
Petitioner,

G.R. No. 172231

Present:

- versus -

ISABELA CULTURAL
CORPORATION,
Respondent.

Ynares-Santiago, J. (Chairperson),
Austria-Martinez,
Callejo, Sr.,
Chico-Nazario, and
Nachura, JJ.
Promulgated:

February 12, 2007

x ---------------------------------------------------------------------------------------- x

DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September
30, 2005 Decision[1] of the Court of Appeals in CA-G.R. SP No. 78426 affirming
the February 26, 2003 Decision[2] of the Court of Tax Appeals (CTA) in CTA Case
No. 5211, which cancelled and set aside the Assessment Notices for deficiency
income tax and expanded withholding tax issued by the Bureau of Internal
Revenue (BIR) against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation,
received from the BIR Assessment Notice No. FAS-1-86-90-000680 for deficiency
income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-8690-000681 for deficiency expanded withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:

(1)
The BIRs disallowance of ICCs claimed expense
deductions for professional and security services billed to and paid by
ICC in 1986, to wit:
(a)
Expenses for the auditing services of SGV & Co., [3] for the
year ending December 31, 1985;[4]
(b)
Expenses for the legal services [inclusive of retainer fees]
of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna
& Bengson for the years 1984 and 1985.[5]
(c)
Expense for security services of El Tigre Security &
Investigation Agency for the months of April and May 1986. [6]
(2)
The alleged understatement of ICCs interest income on
the three promissory notes due from Realty Investment, Inc.

The deficiency expanded withholding tax of P4,897.79 (inclusive of interest

and surcharge) was allegedly due to the failure of ICC to withhold 1% expanded
withholding tax on its claimed P244,890.00 deduction for security services.[7]
On March 23, 1990, ICC sought a reconsideration of the subject
assessments. On February 9, 1995, however, it received a final notice before
seizure demanding payment of the amounts stated in the said notices. Hence, it
brought the case to the CTA which held that the petition is premature because the
final notice of assessment cannot be considered as a final decision appealable to
the tax court. This was reversed by the Court of Appeals holding that a demand
letter of the BIR reiterating the payment of deficiency tax, amounts to a final
decision on the protested assessment and may therefore be questioned before the
CTA. This conclusion was sustained by this Court on July 1, 2001, in G.R. No.
135210.[8] The case was thus remanded to the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting
aside the assessment notices issued against ICC. It held that the claimed
deductions for professional and security services were properly claimed by ICC in
1986 because it was only in the said year when the bills demanding payment were
sent to ICC. Hence, even if some of these professional services were rendered to

ICC in 1984 or 1985, it could not declare the same as deduction for the said years
as the amount thereof could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the
subject promissory notes. It found that it was the BIR which made an
overstatement of said income when it compounded the interest income receivable
by ICC from the promissory notes of Realty Investment, Inc., despite the absence
of a stipulation in the contract providing for a compounded interest; nor of a
circumstance, like delay in payment or breach of contract, that would justify the
application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded
withholding tax on its claimed deduction for security services as shown by the
various payment orders and confirmation receipts it presented as evidence. The
dispositive portion of the CTAs Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice
No. FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for
deficiency expanded withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for the taxable year 1986, are
hereby CANCELLED and SET ASIDE.
SO ORDERED.[9]

Petitioner filed a petition for review with the Court of Appeals, which
affirmed the CTA decision,[10] holding that although the professional services
(legal and auditing services) were rendered to ICC in 1984 and 1985, the cost of
the services was not yet determinable at that time, hence, it could be considered as
deductible expenses only in 1986 when ICC received the billing statements for said
services. It further ruled that ICC did not understate its interest income from the
promissory notes of Realty Investment, Inc., and that ICC properly withheld and
remitted taxes on the payments for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the
instant petition contending that since ICC is using the accrual method of
accounting, the expenses for the professional services that accrued in 1984 and

1985, should have been declared as deductions from income during the said years
and the failure of ICC to do so bars it from claiming said expenses as deduction for
the taxable year 1986. As to the alleged deficiency interest income and failure to
withhold expanded withholding tax assessment, petitioner invoked the presumption
that the assessment notices issued by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1)
sustained the deduction of the expenses for professional and security services from
ICCs gross income; and (2) held that ICC did not understate its interest income
from the promissory notes of Realty Investment, Inc; and that ICC withheld the
required 1% withholding tax from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business,
or professional expenses, like expenses paid for legal and auditing services, are: (a)
the expense must be ordinary and necessary; (b) it must have been paid or
incurred during the taxable year; (c) it must have been paid or incurred in
carrying on the trade or business of the taxpayer; and (d) it must be supported by
receipts, records or other pertinent papers.[11]
The requisite that it must have been paid or incurred during the taxable
year is further qualified by Section 45 of the National Internal Revenue Code
(NIRC) which states that: [t]he deduction provided for in this Title shall be taken
for the taxable year in which paid or accrued or paid or incurred, dependent
upon the method of accounting upon the basis of which the net income is
computed x x x.
Accounting methods for tax purposes comprise a set of rules for determining
when and how to report income and deductions.[12] In the instant case, the
accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the
accrual method of accounting, expenses not being claimed as deductions by a
taxpayer in the current year when they are incurred cannot be claimed as deduction
from income for the succeeding year. Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable deductions for the current year but failed to
do so cannot deduct the same for the next year.[13]

The accrual method relies upon the taxpayers right to receive amounts or its
obligation to pay them, in opposition to actual receipt or payment, which
characterizes the cash method of accounting. Amounts of income accrue where the
right to receive them become fixed, where there is created an enforceable
liability. Similarly, liabilities are accrued when fixed and determinable in amount,
without regard to indeterminacy merely of time of payment.[14]
For a taxpayer using the accrual method, the determinative question is, when
do the facts present themselves in such a manner that the taxpayer must recognize
income or expense? The accrual of income and expense is permitted when the allevents test has been met. This test requires: (1) fixing of a right to income or
liability to pay; and (2) the availability of the reasonable accurate determination of
such income or liability.
The all-events test requires the right to income or liability be fixed, and the
amount of such income or liability be determined with reasonable
accuracy. However, the test does not demand that the amount of income or liability
be known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The all-events test is
satisfied where computation remains uncertain, if its basis is unchangeable; the test
is satisfied where a computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of liability does not have to be
determined exactly; it must be determined with reasonable
accuracy. Accordingly, the term reasonable accuracy implies something
less than an exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer
knew, or could reasonably be expected to have known, at the closing of its
books for the taxable year.[16] Accrual method of accounting presents largely a
question of fact; such that the taxpayer bears the burden of proof of
establishing the accrual of an item of income or deduction.[17]
Corollarily, it is a governing principle in taxation that tax exemptions must
be construed in strictissimi juris against the taxpayer and liberally in favor of the
taxing authority; and one who claims an exemption must be able to justify the

same by the clearest grant of organic or statute law. An exemption from the
common burden cannot be permitted to exist upon vague implications. And since
a deduction for income tax purposes partakes of the nature of a tax exemption, then
it must also be strictly construed.[18]
In the instant case, the expenses for professional fees consist of expenses for
legal and auditing services. The expenses for legal services pertain to the 1984 and
1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala
Pecson Azcuna & Bengson, and for reimbursement of the expenses of said firm in
connection with ICCs tax problems for the year 1984. As testified by the
Treasurer of ICC, the firm has been its counsel since the 1960s. [19] From the
nature of the claimed deductions and the span of time during which the firm was
retained, ICC can be expected to have reasonably known the retainer fees charged
by the firm as well as the compensation for its legal services. The failure to
determine the exact amount of the expense during the taxable year when they could
have been claimed as deductions cannot thus be attributed solely to the delayed
billing of these liabilities by the firm. For one, ICC, in the exercise of due
diligence could have inquired into the amount of their obligation to the firm,
especially so that it is using the accrual method of accounting. For another, it
could have reasonably determined the amount of legal and retainer fees owing to
its familiarity with the rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact
and that the taxpayer bears the burden of establishing the accrual of an expense or
income. However, ICC failed to discharge this burden. As to when the firms
performance of its services in connection with the 1984 tax problems were
completed, or whether ICC exercised reasonable diligence to inquire about the
amount of its liability, or whether it does or does not possess the information
necessary to compute the amount of said liability with reasonable accuracy, are
questions of fact which ICC never established. It simply relied on the defense of
delayed billing by the firm and the company, which under the circumstances, is not
sufficient to exempt it from being charged with knowledge of the reasonable
amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the
financial statements of ICC for the year 1985 cannot be validly claimed as expense

deductions in 1986. This is so because ICC failed to present evidence showing

that even with only reasonable accuracy, as the standard to ascertain its liability
to SGV & Co. in the year 1985, it cannot determine the professional fees which
said company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense
deductions for the professional services were allowable deductions for the taxable
year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they
cannot be validly deducted from its gross income for the said year and were
therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that these
expenses were incurred by ICC in 1986[20] and could therefore be properly claimed
as deductions for the said year.
Anent the purported understatement of interest income from the promissory
notes of Realty Investment, Inc., we sustain the findings of the CTA and the Court
of Appeals that no such understatement exists and that only simple interest
computation and not a compounded one should have been applied by the
BIR. There is indeed no stipulation between the latter and ICC on the application
of compounded interest.[21] Under Article 1959 of the Civil Code, unless there is a
stipulation to the contrary, interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly
withheld the required withholding tax from its claimed deductions for security
services and remitted the same to the BIR is supported by payment order and
confirmation receipts.[22] Hence, the Assessment Notice for deficiency expanded
withholding tax was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of
P333,196.86 for deficiency income tax should be cancelled and set aside but only
insofar as the claimed deductions of ICC for security services. Said Assessment is
valid as to the BIRs disallowance of ICCs expenses for professional
services. The Court of Appeals cancellation of Assessment Notice No. FAS-1-8690-000681 in the amount of P4,897.79 for deficiency expanded withholding tax, is
sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September

30, 2005 Decision of the Court of Appeals in CA-G.R. SP No. 78426,
isAFFIRMED with the MODIFICATION that Assessment Notice No. FAS-1-8690-000680, which disallowed the expense deduction of Isabela Cultural
Corporation for professional and security services, is declared valid only insofar as
the expenses for the professional fees of SGV & Co. and of the law firm, Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson, are concerned. The decision
is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural
Corporations liability under Assessment Notice No. FAS-1-86-90-000680.
SO ORDERED.
CONSUELO YNARES-SANTIAGO
Associate Justice
WE CONCUR:

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

ROMEO J. CALLEJO, SR.

Associate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

ATTESTATION
I attest that the conclusions in the above decision were reached in
consultation before the case was assigned to the writer of the opinion of the Courts
Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division
Chairpersons Attestation, it is hereby certified that the conclusions in the above
Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

THIRD DIVISION

CARMELINO
PANSACOLA,

F.

G.R. No. 159991

Petitioner,
Present:
QUISUMBING, J.,
Chairperson,
CARPIO,

- versus -

CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.
COMMISSIONER
INTERNAL REVENUE,

OF

Responde
nt.

Promulgated:
November 16, 2006

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION
QUISUMBING, J.:
For review on certiorari is the Decision [1] dated June 5, 2003 of the Court
of Appeals in CA-G.R. S.P. No. 60475. The appellate court denied petitioners

availment of the increased amounts of personal and additional exemptions under

Republic Act No. 8424, the National Internal Revenue Code of 1997 [2] (NIRC),
which took effect on January 1, 1998. Also assailed is the appellate courts
Resolution[3] dated September 11, 2003, denying the motion for reconsideration.

The facts are undisputed.

On April 13, 1998, petitioner Carmelino F. Pansacola filed his income tax
return for the taxable year 1997 that reflected an overpayment of P5,950. In it he
claimed the increased amounts of personal and additional exemptions under
Section 35[4] of the NIRC, although his certificate of income tax withheld on
compensation indicated the lesser allowed amounts[5] on these exemptions. He
claimed a refund of P5,950 with the Bureau of Internal Revenue, which was
denied. Later, the Court of Tax Appeals also denied his claim because according to
the tax court, it would be absurd for the law to allow the deduction from a
taxpayers gross income earned on a certain year of exemptions availing on a
different taxable year[6] Petitioner sought reconsideration, but the same was
denied.[7]

On appeal, the Court of Appeals denied his petition for lack of merit. The
appellate court ruled that Umali v. Estanislao,[8] relied upon by petitioner, was
inapplicable to his case. It further ruled that the NIRC took effect on January 1,
1998, thus the increased exemptions were effective only to cover taxable year 1998
and cannot be applied retroactively.

Petitioner, before us, raises a single issue:

[W]hether or not the increased personal and additional exemptions under [the NIRC]
can be availed of by the [p]etitioner for purposes of computing his income tax liability for
the taxable year 1997 and thus be entitled to the refund.[9]

Simply stated, the issue is: Could the exemptions under Section 35 of the
NIRC, which took effect on January 1, 1998, be availed of for the taxable year
1997?

Petitioner argues that the personal and additional exemptions are of a fixed
character based on Section 35 (A) and (B) of the NIRC [10] and as ruled by this
Court in Umali, these personal and additional exemptions are fixed amounts to
which an individual taxpayer is entitled. He contends that unlike other allowable
deductions, the availability of these exemptions does not depend on the taxpayers
profession, trade or business for a particular taxable period. Relying again
inUmali, petitioner alleges that the Court of Appeals erred in ruling that the
increased exemptions were meant to be applied beginning taxable year 1998 and
were to be reflected in the taxpayers returns to be filed on or before April 15,
1999. Petitioner reasons that such ruling would postpone the availability of the
increased exemptions and literally defer the effectivity of the NIRC to January 1,
1999. Petitioner insists that the increased exemptions were already available
on April 15, 1998, the deadline for filing income tax returns for taxable year 1997,
because the NIRC was already effective.

Respondent, through the Office of the Solicitor General, counters that the
increased exemptions were not yet available for taxable year 1997 because all
provisions of the NIRC took effect on January 1, 1998 only; that the fixed
character of personal and additional exemptions does not necessarily mean that
these were not time bound; and petitioners proposition was contrary to Section 35
(C)[11] of the NIRC. It further stated that petitioners exemptions were determined
as of December 31, 1997 and the effectivity of the NIRC during the period of
January 1 to April 15, 1998 did not affect his tax liabilities within the taxable year
1997; and the inclusive period from January 1 to April 15, 1998, the filing dates
and deadline for administrative purposes, was outside of the taxable year
1997. Respondent also maintains that Umali is not applicable to this case.

Prefatorily, personal and additional exemptions under Section 35 of the

NIRC are fixed amounts to which certain individual taxpayers (citizens, resident
aliens)[12] are entitled. Personal exemptions are the theoretical personal, living and
family expenses of an individual allowed to be deducted from the gross or net
income of an individual taxpayer. These are arbitrary amounts which have been
calculated by our lawmakers to be roughly equivalent to the minimum of
subsistence,[13] taking into account the personal status and additional qualified

dependents of the taxpayer. They are fixed amounts in the sense that the amounts
have been predetermined by our lawmakers as provided under Section 35 (A) and
(B). Unless and until our lawmakers make new adjustments on these personal
exemptions, the amounts allowed to be deducted by a taxpayer are fixed as
predetermined by Congress.

A careful scrutiny of the provisions[14] of the NIRC specifically shows that

Section 79 (D)[15] provides that the personal and additional exemptions shall be
determined in accordance with the main provisions in Title II of the NIRC. Its main
provisions pertain to Section 35 (A) and (B) which state,

SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. (A) In General.-For purposes of determining the tax provided in Section
24(A) of this Title,[16] there shall be allowed a basic personal exemption as
follows:
xxxx
For each married individual P32,000
xxxx
(B) Additional Exemption for Dependents.There shall be allowed an
additional exemption of Eight thousand pesos (P8,000) for each dependent not
exceeding four (4).(Emphasis ours.)

Section 35 (A) and (B) allow the basic personal and additional exemptions
as deductions from gross or net income, as the case maybe, to arrive at the correct
taxable income of certain individual taxpayers. Section 24 (A) (1) (a) imposed
income tax on a resident citizens taxable income derived for each taxable year. It
provides as follows:
SEC. 24. Income Tax Rates.
(A) Rates of Income Tax on Individual Citizen
(1) An income tax is hereby imposed:
(a)

On the taxable income defined in Section 31 of this Code, other than

income subject to tax under Subsections (B), [17] (C),[18] and (D)[19] of
this Section, derived for each taxable year from all sources within and
without the Philippines by every individual citizen of the Philippines
residing therein; (Emphasis ours.)

Section 31 defines taxable income as the pertinent items of gross income

specified in the NIRC, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by the NIRC or other
special laws. As defined in Section 22 (P),[20] taxable year means the calendar
year, upon the basis of which the net income is computed under Title II of the
NIRC. Section 43[21] also supports the rule that the taxable income of an individual
shall be computed on the basis of the calendar year. In addition, Section
45[22] provides that the deductions provided for under Title II of the NIRC shall be

taken for thetaxable year in which they are paid or accrued or paid or
incurred.

Moreover, Section 79 (H)[23] requires the employer to determine, on or before

the end of the calendar year but prior to the payment of the compensation for the
last payroll period, the tax due from each employees taxable compensation income
for the entire taxable year in accordance with Section 24 (A). This is for the
purpose of either withholding from the employees December salary, or refunding
to him not later than January 25 of the succeeding year, the difference between the
tax due and the tax withheld.

Therefore, as provided in Section 24 (A) (1) (a) in relation to Sections 31

and 22 (P) and Sections 43, 45 and 79 (H) of the NIRC, the income subject to
income tax is the taxpayers income as derived and computed during the calendar
year, his taxable year.

Clearly from the abovequoted provisions, what the law should consider for
the purpose of determining the tax due from an individual taxpayer is his status and
qualified dependents at the close of the taxable year and not at the time the return
is filed and the tax due thereon is paid. Now comes Section 35 (C) of the NIRC
which provides,
Sec. 35. Allowance of Personal Exemption for Individual Taxpayer.
xxxx
(C) Change of Status. If the taxpayer marries or should have additional
dependent(s) as defined above during the taxable year, the taxpayer may claim
the corresponding additional exemption, as the case may be, in full for such
year.
If the taxpayer dies during the taxable year, his estate may still claim the
personal and additional exemptions for himself and his dependent(s) as if he
died at the close of such year.

If the spouse or any of the dependents dies or if any of such dependents

marries, becomes twenty-one (21) years old or becomes gainfully employed
during the taxable year, the taxpayer may still claim the same exemptions as if
the spouse or any of the dependents died, or as if such dependents married,
became twenty-one (21) years old or became gainfully employed at the close
of such year.

Emphasis must be made that Section 35 (C) of the NIRC allows a taxpayer
to still claim the corresponding full amount of exemption for a taxable year, e.g. if
he marries; have additional dependents; he, his spouse, or any of his dependents
die; and if any of his dependents marry, turn 21 years old; or become gainfully
employed. It is as if the changes in his or his dependents status took place at the
close of the taxable year.

Consequently, his correct taxable income and his corresponding allowable

deductions e.g. personal and additional deductions, if any, had already been
determined as of the end of the calendar year.

In the case of petitioner, the availability of the aforementioned deductions if

he is thus entitled, would be reflected on his tax return filed on or before the
15thday of April 1999 as mandated by Section 51 (C) (1).[24] Since the NIRC took
effect on January 1, 1998, the increased amounts of personal and additional
exemptions under Section 35, can only be allowed as deductions from the
individual taxpayers gross or net income, as the case maybe, for the taxable year
1998 to be filed in 1999. The NIRC made no reference that the personal and
additional exemptions shall apply on income earned before January 1, 1998.

Thus, petitioners reliance in Umali is misplaced.

In Umali, we noted that despite being given authority by Section 29 (1) (4)
of the National Internal Revenue Code of 1977 to adjust these exemptions, no
adjustments were made to cover 1989. Note that Rep. Act No. 7167 is entitled
An Act Adjusting the Basic Personal and Additional Exemptions Allowable to
Individuals for Income Tax Purposes to the Poverty Threshold Level, Amending for
the Purpose Section 29, Paragraph (L), Items (1) and (2) (A), of the National
[25]

Internal Revenue Code, As Amended, and For Other Purposes. Thus, we said
in Umali, that the adjustment provided by Rep. Act No. 7167 effective 1992,
should consider the poverty threshold level in 1991, the time it was enacted. And
we observed therein that since the exemptions would especially benefit lower and
middle-income taxpayers, the exemption should be made to cover the past year
1991. To such an extent, Rep. Act No. 7167 was a social legislation intended to
remedy the non-adjustment in 1989. And as cited in Umali, this legislative intent
is also clear in the records of the House of Representatives Journal.

This is not so in the case at bar. There is nothing in the NIRC

that expresses any such intent. The policy declarations in its
enactment do not indicate it was a social legislation that adjusted
personal and additional exemptions according to the poverty
threshold level nor is there any indication that its application
should retroact. At the time petitioner filed his 1997 return and
paid the tax due thereon in April 1998, the increased amounts of
personal and additional exemptions in Section 35 were not yet
available. It has not yet accrued as of December 31, 1997, the
last day of his taxable year. Petitioners taxable income covers
his income for the calendar year 1997. The law cannot be given
retroactive effect. It is established that tax laws are prospective
in application, unless it is expressly provided to apply
retroactively.[26] In the NIRC, we note, there is no specific mention
that the increased amounts of personal and additional exemptions
under Section 35 shall be given retroactive effect. Conformably
too, personal and additional exemptions are considered as
deductions from gross income. Deductions for income tax
purposes partake of the nature of tax exemptions, hence strictly
construed[27] against the taxpayer[28] and cannot be allowed
unless granted in the most explicit and categorical
language[29] too plain to be mistaken.[30] They cannot be
extended by mere implication or inference. [31] And, where a
provision of law speaks categorically, the need for interpretation
is obviated, no plausible pretense being entertained to justify non-

compliance. All that has to be done is to apply it in every case

that falls within its terms.[32]

Accordingly, the Court of Appeals and the Court of Tax Appeals were
correct in denying petitioners claim for refund.

WHEREFORE, the petition is DENIED for lack of merit. The

Decision dated June 5, 2003 and the Resolution dated September 11, 2003 of the
Court of Appeals in CA-G.R. S.P. No. 60475 are hereby AFFIRMED.
SO ORDERED.

LEONARDO A.
QUISUMBING
Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice

CONCHITA CARPIO
MORALES

DANTE O. TINGA
Associate Justice

Associate Justice

PRESBITERO J. VELASCO, JR.

Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision had been
reached in consultation before the case was assigned to the writer
of the opinion of the Courts Division.

LEONARDO A.
QUISUMBING
Associate Justice
Chairperson

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and
the Division Chairpersons Attestation, I certify that the
conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the
opinion of the Courts Division.

ARTEMIO V. PANGANIBAN
Chief Justice

THIRD DIVISION

COMMISSIONER OF INTERNAL
159647
REVENUE,

G.R. No.

Petitioner,

Present:
Panganiban, J.,

Chairman,
Sandoval-Gutierrez,
- versus Corona,
Carpio Morales, and
Garcia, JJ
CENTRAL
LUZON
Promulgated:

DRUG

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
An Inside Look At The Newest And Most Amazing Cruise Ship
In The World (The Daily Western)

Before us is a Petition for Review[1] under Rule 45 of

the Rules of Court, seeking to set aside the August 29,
2002 Decision[2] and the August 11, 2003 Resolution[3] of
the Court of Appeals (CA) in CA-GR SP No. 67439. The
assailed Decision reads as follows:
WHEREFORE, premises considered,
appealed from is AFFIRMED in toto. No costs.[4]

the

Resolution

The assailed Resolution denied petitioners 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, 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

a Decision[5] dismissing respondents Petition for lack of merit. In
said decision, the [CTA] justified its ruling with the following
ratiocination:

x x x, 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 x x.
x x x

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 [CTA],

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

However, Sec. 229 clearly does not apply in the instant

case because the tax sought to be refunded or credited by
petitioner was not erroneously paid or illegally collected. We take
exception to the CTAs sweeping but unfounded statement that
both tax refund and tax credit are modes of recovering taxes
which are either erroneously or illegally paid to the 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
VAT-registered 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

x.[7]

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:
Whether the Court of Appeals erred in holding that respondent may
claim the 20% sales discount as a tax credit instead of as a
deduction from gross income or gross sales.

Whether the Court of Appeals erred in holding that respondent is

entitled to a refund.[9]

These two issues may be summed up in only one:

whether respondent, despite incurring a net loss, may
still claim the 20 percent sales discount as a tax credit.

The Courts Ruling

The Petition is not meritorious.

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

Section 4a) of RA 7432[10] grants to senior citizens

the privilege of obtaining a 20 percent discount on their
purchase of medicine from any private establishment in
the country.[11] The latter may then claim the cost of the
discount as a tax credit.[12]

But can such credit be

claimed, even though an establishment operates at a

loss?

We answer in the affirmative.

Tax Credit versus

Tax Deduction

Although the term is not specifically defined in our

Tax Code,[13] tax credit generally refers to an amount that
is subtracted directly from ones total tax liability. [14] It
is an allowance against the tax itself[15] or a deduction

from what is owed[16] by a taxpayer to the government.

Examples of tax credits are withheld taxes, payments of
estimated tax, and investment tax credits.[17]

Tax credit should be understood in relation to

other tax concepts.
defined

as

One of these is tax deduction --

subtraction

from

income

for

tax

purposes,[18] or an amount that is allowed by law to

reduce income prior to [the] application of the tax rate to
compute the amount of tax which is due.[19] An example
of a tax deduction is any of the allowable deductions
enumerated in Section 34[20] 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
after applying the corresponding tax rates to taxable
income.[21] A tax deduction, on the other, reduces the
income that is subject to tax[22] in order to arrive
at taxable income.[23] To think of the former as the latter
is to avoid, if not entirely confuse, the issue.

A tax

credit is used only after the tax has been computed;

a tax deduction, before.

Tax Liability Required

for Tax Credit

Since a tax credit is used to reduce directly the tax

that

is

due,

there

ought

to

be

liability before the tax credit can be applied.

tax

Without

that liability, any tax credit application will be useless.

There will be no reason for deducting the latter when
there is, to begin with, no existing 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
credit can be applied.[24] For the establishment to choose
the

immediate

premature

and

availment

of

impracticable.

a tax

credit will

Nevertheless,

be
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
donors taxes -- again when paid to a foreign country -- in
computing for the donors 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 persons
beginning inventory of goods, materials and supplies,
when such amount -- as computed -- is higher than the

actual VAT paid on the said items. [25] Clearly from this
provision, the tax credit refers 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

credit certificate 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 the input taxes have not been applied against output
taxes.[26] 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

deemed paid.[27] Although true, this provision actually
refers

to

the tax

credit as

a condition only

for

the

imposition of a lower tax rate, not as a 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 corporation, the tax to be foregone or spared.[28]

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,

credit may

be

allowed,

subject

to

the

a tax

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 petitioners 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 tax levied in the latter.[29]
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
Pambansa Blg. (BP) 391, include tax credits equivalent to
either five percent of the net value earned, or five or ten
percent of the net local content of exports.[30] 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 establishments concerned. [31]
However, we do not agree with its finding[32] that the
carry-over of tax credits under the said special law to
succeeding taxable 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 amount of discounts they grant.
[33]

In turn, the Implementing Rules and Regulations,

issued pursuant thereto, provide the procedures for its

availment.[34]

To deny such credit, despite the plain

mandate of the law and the regulations carrying out that

mandate, is indefensible.

First,
erroneous.

the
It

definition
refers

given

to tax

by

credit as

petitioner
the

is

amount

representing the 20 percent discount that shall be

deducted by the said establishments from their gross
income for income tax purposes and from their gross
sales for

value-added

purposes.[35]

tax

or

other

percentage

tax

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,

discount

is

an

abatement or reduction made from the gross amount or

value of anything.[36]

To be more precise, it is in

business parlance a deduction or lowering of an amount

of money;[37] or a reduction from the full amount or
value of something, especially a price.[38] In business
there are many kinds of discount, the most common of
which

is

that

affecting

the income

statement[39] 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 to credit customers for their
prompt payment.[40] It is a reduction in price offered to
the purchaser if payment is made within a shorter period
of time than the maximum time specified. [41]

Also

referred to as a sales discounton the part of the seller

and a purchase discount on the part of the buyer, it may
be expressed in such terms as 5/10, n/30.[42]

A quantity discount, however, is a reduction in

price allowed for purchases made in large quantities,
justified

by

savings

in

packaging,

shipping,

and

handling.[43] It is also called a volume or bulk discount.

[44]

A percentage reduction from the list price x x x

allowed

by

manufacturers

to

wholesalers

and

by

wholesalers to retailers[45] is known as atrade discount.

No entry for it need be made in the manual or
computerized books of accounts, since the purchase or
sale is already valued at the net price actually charged
the buyer.[46]

The purpose for the discount is to

encourage trading or increase sales, and the prices at

which the purchased goods may be resold are also

suggested.[47]

Even

a chain

discount --

series

of

discounts from one list price -- is recorded at net.[48]

Finally, akin to a trade discount is a functional

discount. It is a suppliers price discount given to a
purchaser based on the [latters] role in the [formers]
distribution

system.[49]

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, this type of
discount is reflected in the income statement[50] as a line
item deducted -- along with returns, allowances, rebates
and other similar expenses -- from gross sales to arrive
at net sales.[51] This type of presentation is resorted to,
because the accounts receivable and sales figures that
arise fromsales 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 amounts of the
invoices.[52]

This manner of recording credit sales --

known as the gross method -- is most widely used,

because it is simple, more convenient to apply than
the net method, and produces no material errors over
time.[53]

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

deducted

--

are

recorded

in

the books

of

accounts[54] and reflected in the financial statements. A

separate line item cannot be shown, [55] because the
transactions

themselves

involving

both accounts

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

--

returns,allowances and cost

along
of

goods

with sales
sold[56] --

is

deducted from gross sales to come up with the gross

income, profit or margin[57] derived from business.[58] 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

be

excluded

from

the gross

sales within the same quarter they were given.[59] 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.
these

two provisions

affirm

thatsales

After all,

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 establishments outright
deduction of the discount from the invoice price of the
medicine sold to the senior citizen.[60] 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 perfection of the sale.[61]
Although prompt payment is made for an arms-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
the income

stress,

the

effect

of

a sales

statement and income

tax

discount on

return of

an

establishment covered by RA 7432 is different from that

resulting

from

the availment or use of

its tax

credit benefit. While the former is a deduction before,

the

latter

computed.

is

deduction after,

the income

tax is

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. Ubi lex non distinguit, nec nos
distinguere

debemus.

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 taxpurposes, 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 statementand 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 that operates to create
a rule out of harmony with the statute is a mere nullity;
[62]

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
enforce it x x x.[63]

In the scheme of judicial tax

administration, the need for certainty and predictability

in the implementation of tax laws is crucial.[64] Our tax
authorities fill in the details that Congress may not have
the opportunity or competence to provide.[65]

The

regulations these authorities issue are relied upon by

taxpayers, who are certain that these will be followed by
the courts.[66] 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

legislature.[67]

In case of conflict, the law must prevail. [68] A

regulation

adopted

pursuant

to

law

is

law.[69]

Conversely, a regulation or any portion thereof not

adopted pursuant to law is no law and has neither the
force nor the effect of law.[70]

Availment of Tax
Credit Voluntary

Third,

the

statute[71] implies

word may in
that

the

text

the availability

of

of

the

the tax

credit benefit is neither unrestricted nor mandatory.[72]

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 control and discretion of the taxpayer. [73] For the
tax authorities to compel respondent to deduct the 20
percent

discount

from

either

its gross

income or

its gross sales[74] is, therefore, not only to make an

imposition without basis in 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.

Granting that there is a tax liability and respondent

claims such cost as a tax credit, then the tax credit can
easily be applied. If there is none, the credit cannot be
used and will just have to be carried over and
revalidated[75] accordingly.

If, however, the business

continues to operate at a loss and no other taxes are due,

thus compelling it to close shop, the credit can never be
applied and will be lost altogether.

In other words, 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. RA 7432 does not
give respondent the unfettered right to avail itself of the
credit whenever it pleases. Neither does it allow our tax
administrators to expand or contract the legislative
mandate.

The plain meaning rule or verba legis in

statutory construction is thus applicable x x x. 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.[76]

Tax Credit Benefit

Deemed Just Compensation

Fourth, Sections 2.i and 4 of RR 2-94 deny the

exercise by the State of its power of eminent domain. Be
it stressed that the privilege enjoyed by senior citizens
does not come directly from the State, but rather from
the

private

establishments

concerned.

Accordingly,

the tax credit benefit granted to these establishments

can be deemed as their just compensation for private
property taken by the State for public use.[77]

The concept of public use is no longer confined to

the traditional notion of use by the public, but held
synonymous with public interest, public benefit,public
welfare,

and public

convenience.[78]

The

discount

privilege to which our senior citizens are entitled is

actually a benefit enjoyed by the general public to which
these citizens belong. The discounts given would have
entered the coffers and formed part of the gross sales of
the private establishments concerned, were it not for RA
7432. The permanent reduction in their total revenues is

a forced subsidy corresponding to the taking of private

property for public use or benefit.

As a result of the 20 percent discount imposed by

RA

7432,

respondent

becomes

entitled

to

a just

compensation. This term refers not only to the issuance

of a tax credit certificate indicating the correct amount
of the discounts given, but also to the promptness in its
release. Equivalent to the payment of property taken by
the State, such issuance -- when not done within
a reasonable time from the grant of the discounts -cannot be considered as just compensation. In effect,
respondent is made to suffer the consequences of being
immediately deprived of its revenues while awaiting
actual receipt, through the certificate, of the equivalent
amount it needs to cope with the reduction in its
revenues.[79]

Besides, the taxation power can also be used as an

implement for the exercise of the power of eminent
domain.[80] Tax measures are but enforced contributions
exacted on pain of penal sanctions[81] and clearly
imposed for a public purpose.[82] In recent years, the

power to tax has indeed become a most effective tool to

realize social justice, public welfare, and the equitable
distribution of wealth.[83]

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. The
social justice consecrated in our [C]onstitution [is] not
intended to take away rights from a person and give
them to another who is not entitled thereto. [84] For this
reason, a just compensation for income that is taken
away from respondent becomes necessary.

It is in

the tax credit that our legislators find support to realize

social justice, and no administrative body can alter that
fact.

To put it differently, a private establishment that

merely breaks even[85] -- without the discounts yet -- will
surely start to incur losses because of such discounts.
The same effect is expected if its mark-up is less than 20
percent, and if all its sales come from retail purchases by
senior citizens.

Aside from the observation we have

already raised earlier, it will also be grossly unfair to an

establishment if the discounts will be treated merely as
deductions from either its gross income or its gross
sales. Operating at a loss through no fault of its own, it
will realize that the tax credit limitation under RR 2-94 is
inutile,

if

not

improper.

Worse,

profit-generating

businesses will be put in a better position if they avail

themselves of tax credits denied those that are losing,
because no taxes are due from the latter.

Grant of Tax Credit

Intended by the Legislature

Fifth, 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 them.
[86]

These

objectives

are

consonant

with

the

constitutional policy of making health x x x services

available to all the people at affordable cost[87] and of
giving priority for the needs of the x x x elderly. [88]
Sections 2.i and 4 of RR 2-94, however, contradict these
constitutional policies and statutory objectives.

Furthermore, Congress has allowed all private

establishments a simple tax credit, not a deduction. In
fact, no cash outlay is required from the government for
the availment or use of such credit. The deliberations on
February

5,

1992

of

the

Bicameral

Conference

Committee Meeting on Social Justice, which finalized RA

7432, disclose the true intent of our legislators to treat
the sales discounts as a tax credit, rather than as a
deduction from gross income.

We quote from those

deliberations as follows:
"THE CHAIRMAN (Rep. Unico).
By the way, before that ano,
about deductions from taxable income. I think we
incorporated there a provision na - on the
responsibility of the private hospitals and
drugstores, hindi ba?

SEN. ANGARA.

Oo.

THE CHAIRMAN.

(Rep. Unico), So, I think we have to put in also a

provision here about the deductions from taxable
income of that private hospitals, di ba ganon
'yan?

MS. ADVENTO.

Kaya lang po sir, and mga discounts po nila

affecting government and public institutions, so,
puwede na po nating hindi isama yung mga less
deductions ng taxable income.

THE CHAIRMAN.

(Rep. Unico). Puwede na. Yung about the

private hospitals. Yung isiningit natin?

MS. ADVENTO.

Singit na po ba yung 15% on credit.

(inaudible/did not use the microphone).

SEN. ANGARA.

Hindi pa, hindi pa.

THE CHAIRMAN.

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

SEN. ANGARA.

Oo. You want to insert that?

THE CHAIRMAN

(Rep. Unico).
Senator Shahani, e.

Yung ang proposal ni

SEN. ANGARA.

In the case of private hospitals they got the grant

of 15% discount, provided that, the private
hospitals can claim the expense as a tax credit.

REP. AQUINO.

Yah could be allowed as deductions in the

perpetrations of (inaudible) income.

SEN. ANGARA.

I-tax credit na lang natin para walang cash-out

ano?

REP. AQUINO.

Oo, tax credit. Tama, Okay. Hospitals ba o lahat

ng establishments na covered.

THE CHAIRMAN.

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

hospitals lang.

REP. AQUINO.

Ano ba yung establishments na covered?

SEN. ANGARA.

Restaurant lodging houses, recreation centers.

REP. AQUINO.

All establishments covered siguro?

SEN. ANGARA.

From all establishments. Alisin na natin 'Yung

kuwan kung ganon. Can we go back to Section 4
ha?

REP. AQUINO.

Oho.

SEN. ANGARA.

Letter A. To capture that thought, we'll say the

grant of 20% discount from all establishments et
cetera,
et
cetera,
provided
that
said
establishments
provided
that
private
establishments may claim the cost as a tax credit.
Ganon ba 'yon?

REP. AQUINO.

Yah.

SEN. ANGARA.

Dahil kung government, they don't need to claim

it.

THE CHAIRMAN.

SEN. ANGARA.

(Rep. Unico). Tax credit.

As a tax credit [rather] than a kuwan - deduction,

Okay.

REP. AQUINO

Okay.

SEN. ANGARA.

Sige Okay. Di subject to style na lang sa Letter

A".[89]

Special Law
Over General Law

Sixth and last, RA 7432 is a special law that should

prevail over the Tax Code -- a general law. x x x [T]he
rule is that on a specific matter the special law shall
prevail over the general law, which shall be resorted to
only to supply deficiencies in the former.[90] In addition,
[w]here there are two statutes, the earlier special and
the later general -- the terms of the general broad
enough to include the matter provided for in the special
-- the fact that one is special and the other is general
creates

presumption

that

the

special

is

to

be

considered as remaining an exception to the general,

[91]

one as a general law of the land, the other as the law

of a particular case.[92]

It is a canon of statutory

construction that a later statute, general in its terms and

not

expressly

repealing

a prior

special statute,

will

ordinarily not affect the special provisions of such earlier

statute.[93]

RA 7432 is an earlier law not expressly repealed

by, and therefore remains an exception to, the Tax Code
-- a later law.

When the former states that a tax

credit may be claimed, then the requirement of prior tax

payments under certain provisions of the latter, as
discussed above, cannot be made to apply. Neither can

the instances of or references to a tax deduction under

the Tax Code[94] be made to restrict RA 7432.

No

provision of any revenue regulation can supplant or

modify the acts of Congress.

WHEREFORE, the Petition is hereby DENIED.

The assailed Decision and Resolution of the Court of
Appeals AFFIRMED. No pronouncement as to costs.

SO ORDERED.

ARTEMIO V. PANGANIBAN
Associate Justice
Chairman, Third Division

W E C O N C U R:

ANGELINA SANDOVALGUTIERREZ

RENATO C.
CORONA

Associate Justice

Associate Justice

CONCHITA CARPIO MORALES

CANCIO C.
GARCIA

Associate Justice

Associate Justice

ATTESTATION

I attest that the conclusions in the above decision

had been reached in consultation before the case was
assigned to the writer of the opinion of the Courts
Division.

ARTEMIO V. PANGANIBAN
Associate Justice
Chairman, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the

Constitution, and the Chairmans Attestation, it is hereby
certified that the conclusions in the above Decision had
been reached in consultation before the case was
assigned to the writer of the opinion of the Courts
Division.

SECOND DIVISION
COMMISSIONER OF INTERNAL
REVENUE,
Petitioner,
-

versus

CENTRAL LUZON DRUG

CORPORATION,
Respondent.

G.R. No. 148512

Present:
PUNO, J., Chairperson,
SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
GARCIA, JJ.
Promulgated:
June 26, 2006

x ---------------------------------------------------------------------------------------- x

DECISION
AZCUNA, J.:
This is a petition for review under Rule 45 of the Rules of Court seeking the
nullification of the Decision, dated May 31, 2001, of the Court of Appeals (CA) in
CA-G.R. SP No. 60057, entitled Central Luzon Drug Corporation v.
Commissioner of Internal Revenue, granting herein respondent Central Luzon
Drug Corporations claim for tax credit equal to the amount of the 20% discount
that it extended to senior citizens on the latters purchase of medicines pursuant to
Section 4(a) of Republic Act (R.A.) No. 7432, entitled An Act to Maximize the
Contribution of Senior Citizens to Nation Building, Grant Benefits and Special
Privileges and for other Purposes otherwise known as the Senior Citizens Act.
The antecedents are as follows:
Central Luzon Drug Corporation has been a retailer of medicines and other
pharmaceutical products since December 19, 1994. In 1995, it opened three (3)
drugstores as a franchisee under the business name and style of Mercury Drug.
For the period January 1995 to December 1995, in conformity to the
mandate of Sec. 4(a) of R.A. No. 7432, petitioner granted a 20% discount on the
sale of medicines to qualified senior citizens amounting to P219,778.
Pursuant to Revenue Regulations No. 2-94[1] implementing R.A. No. 7432,
which states that the discount given to senior citizens shall be deducted by the
establishment from its gross sales for value-added tax and other percentage tax
purposes, respondent deducted the total amount of P219,778 from its gross income
for the taxable year 1995. For said taxable period, respondent reported a net loss
of P20,963 in its corporate income tax return. As a consequence, respondent did
not pay income tax for 1995.
Subsequently, on December 27, 1996, claiming that according to Sec. 4(a) of
R.A. No. 7432, the amount of P219,778 should be applied as a tax credit,
respondent filed a claim for refund in the amount of P150,193, thus:

Net Sales
P 37,014,807.00
Add: Cost of 20% Discount
to
Senior
Citizens
219,778.00
Gross Sales
P 37,234,585.00
Less: Cost of Sales
Merchandise Inventory, beg
P 1,232,740.00
Purchases
41,145,138.00
Merchandise
Inventory,
end
8,521,557.00
33,856,621.00
Gross
Profit
P 3,377,964.00
Miscellaneous Income
39,014.00
Total
Income
3,416,978.00
Operating
Expenses
3,199,230.00
Net
Income
Before
Tax
P
217,748.00
Income
Tax
(35%)
69,585.00
Less: Tax Credit
(Cost of 20% Discount
to
Senior
Citizens)
219,778.00
Income
Tax
Payable
(P 150,193.00)
Income Tax Actually Paid
-0Tax
Tax

Refundable/Overpaid
(P 150,193.00)

Income

As shown above, the amount of P150,193 claimed as a refund represents the

tax credit allegedly due to respondent under R.A. No. 7432. Since the
Commissioner of Internal Revenue was not able to decide the claim for refund on
time,[2] respondent filed a Petition for Review with the Court of Tax Appeals
(CTA) on March 18, 1998.

On April 24, 2000, the CTA dismissed the petition, declaring that even if the
law treats the 20% sales discounts granted to senior citizens as a tax credit, the
same cannot apply when there is no tax liability or the amount of the tax credit is
greater than the tax due. In the latter case, the tax credit will only be to the extent
of the tax liability.[3] Also, no refund can be granted as no tax was erroneously,
illegally and actually collected based on the provisions of Section 230, now
Section 229, of the Tax Code. Furthermore, the law does not state that a refund can
be claimed by the private establishment concerned as an alternative to the tax
credit.
Thus, respondent filed with the CA a Petition for Review on August 3, 2000.
On May 31, 2001, the CA rendered a Decision stating that Section 229 of the
Tax Code does not apply in this case. It concluded that the 20% discount given to
senior citizens which is treated as a tax credit pursuant to Sec. 4(a) of R.A. No.
7432 is considered just compensation and, as such, may be carried over to the next
taxable period if there is no current tax liability. In view of this, the CA held:
WHEREFORE, the instant petition is hereby GRANTED and the
decision of the CTA dated 24 April 2000 and its resolution dated 06 July
2000 are SET ASIDE. A new one is entered granting petitioners claim
for tax credit in the amount of Php: 150,193.00. No costs.
SO ORDERED.[4]

Hence, this petition raising the sole issue of whether the 20% sales discount
granted by respondent to qualified senior citizens pursuant to Sec. 4(a) of R.A. No.
7432 may be claimed as a tax credit or as a deduction from gross sales in
accordance with Sec. 2(1) of Revenue Regulations No. 2-94.
Sec. 4(a) of R.A. No. 7432 provides:
Sec. 4. Privileges for the Senior citizens. The senior citizens
shall be entitled to the following:

(a)

the grant of twenty percent (20%) discount from all

establishments relative to utilization of transportations
services, hotels and similar lodging establishments,
restaurants and recreation centers and purchase of
medicines anywhere in the country: Provided, That private
establishments may claim the cost as tax credit.

The CA and the CTA correctly ruled that based on the plain wording of the
law discounts given under R.A. No. 7432 should be treated as tax credits, not
deductions from income.
It is a fundamental rule in statutory construction that the legislative intent
must be determined from the language of the statute itself especially when the
words and phrases therein are clear and unequivocal. The statute in such a case
must be taken to mean exactly what it says. [5] Its literal meaning should be
followed;[6] to depart from the meaning expressed by the words is to alter the
statute.[7]
The above provision explicitly employed the word tax credit. Nothing in
the provision suggests for it to mean a deduction from gross sales. To construe it
otherwise would be a departure from the clear mandate of the law.
Thus, the 20% discount required by the Act to be given to senior citizens is a
tax credit, not a deduction from the gross sales of the establishment concerned. As
a corollary to this, the definition of tax credit found in Section 2(1) of Revenue
Regulations No. 2-94 is erroneous as it refers to tax credit as the amount
representing the 20% discount that shall be deducted by the said establishment
from their gross sales for value added tax and other percentage tax purposes. This
definition is contrary to what our lawmakers had envisioned with regard to the
treatment of the discount granted to senior citizens.
Accordingly, when the law says that the cost of the discount may be claimed
as a tax credit, it means that the amount -- when claimed shall be treated as a
reduction from any tax liability.[8] The law cannot be amended by a mere
regulation. The administrative agencies issuing these regulations may not enlarge,

alter or restrict the provisions of the law they administer.[9] In fact, a regulation that
operates to create a rule out of harmony with the statute is a mere nullity.[10]
Finally, for purposes of clarity, Sec. 229 [11] of the Tax Code does not apply to
cases that fall under Sec. 4 of R.A. No. 7432 because the former provision governs
exclusively all kinds of refund or credit of internal revenue taxes that were
erroneously or illegally imposed and collected pursuant to the Tax Code while the
latter extends the tax credit benefit to the private establishments concerned even
before tax payments have been made. The tax credit that is contemplated under the
Act is a form of just compensation, not a remedy for taxes that were erroneously or
illegally assessed and collected. In the same vein, prior payment of any tax liability
is not a precondition before a taxable entity can benefit from the tax credit. The
credit may be availed of upon payment of the tax due, if any. Where there is no tax
liability or where a private establishment reports a net loss for the period, the tax
credit can be availed of and carried over to the next taxable year.
It must also be stressed that unlike in Sec. 229 of the Tax Code wherein the
remedy of refund is available to the taxpayer, Sec. 4 of the law speaks only of a tax
credit, not a refund.
As earlier mentioned, the tax credit benefit granted to the establishments can
be deemed as their just compensation for private property taken by the State for
public use. The privilege enjoyed by the senior citizens does not come directly
from the State, but rather from the private establishments concerned.[12]
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals in CA-G.R. SP No. 60057, dated May 31, 2001, is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

ADOLFO S. AZCUNA
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chairperson
Associate Justice

ANGELINA SANDOVAL-GUTIERREZ
Associate Justice

RENATO C. CORONA
Associate Justice

CANCIO C. GARCIA
Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision were reached in
consultation before the case was assigned to the writer of the opinion of the Courts
Division.

REYNATO S. PUNO
Associate Justice
Chairperson, Second Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division
Acting Chairpersons Attestation, it is hereby certified that the conclusions in the
above Decision had been reached in consultation before the case was assigned to
the writer of the opinion of the Courts Division.

ARTEMIO V. PANGANIBAN
BICOLANDIA DRUG CORPORATION
(FORMERLY ELMAS DRUG
COPRORATION),
Petitioner,
-

G.R. No. 142299

Present:
PUNO, J., Chairperson,
SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
GARCIA, JJ.

versus -

COMMISSIONER OF INTERNAL
REVENUE,
Respondent.

Promulgated:

June 22, 2006

x ---------------------------------------------------------------------------------------- x

DECISION
AZCUNA, J.:
This is a petition for review [1] by Bicolandia Drug Corporation, formerly
known as Elmas Drug Corporation, seeking the nullification of the Decision and
Resolution of the Court of Appeals, dated October 19, 1999 and February 18, 2000,
respectively, in CA-G.R SP No. 49946 entitled Commissioner of Internal Revenue
v. Elmas Drug Corporation.
The controversy primarily involves the proper interpretation of the term
cost in Section 4 of Republic Act (R.A.) No. 7432, otherwise known as An Act
to
Maximize
the
Contribution
of
Senior
Citizens
to Nation
Building, Grant Benefits and Special Privileges and for Other Purposes.
The facts[2] of the case are as follows:

Petitioner Bicolandia Drug Corporation is a domestic corporation principally

engaged in the retail of pharmaceutical products. Petitioner has a drugstore located
in Naga City under the name and business style of Mercury Drug.
Pursuant to the provisions of R.A. No. 7432, entitled An Act to Maximize
the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special
Privileges and for Other Purposes, also known as the Senior Citizens Act, and
Revenue Regulations No. 2-94, petitioner granted to qualified senior citizens a
20% sales discount on their purchase of medicines covering the period from July
19, 1993 to December 31, 1994.
When petitioner filed its corresponding corporate annual income tax returns
for taxable years 1993 and 1994, it claimed as a deduction from its gross income
the respective amounts of P80,330 and P515,000 representing the 20% sales
discount it granted to senior citizens.
On March 28, 1995, however, alleging error in the computation and claiming
that the aforementioned 20% sales discount should have been treated as a tax credit
pursuant to R.A. No. 7432 instead of a deduction from gross income, petitioner
filed a claim for refund or credit of overpaid income tax for 1993 and 1994,
amounting to P52,215 and P334,750, respectively. Petitioner computed the
overpayment as follows:

Income tax benefit of tax credit

100%
Income tax benefit of tax deduction
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

35%
65%

P80,330
x 65%
P52,215

P515,000
x 65%
P334,750

On December 29, 1995, 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, now Section 229, of the
Tax Code.
It contended that Section 4 of R.A. No. 7432 provides in clear and
unequivocal language that discounts granted to senior citizens may be claimed as a
tax credit. Revenue Regulations No. 2-94, therefore, which is merely an
implementing regulation cannot modify, alter or depart from the clear mandate of
Section 4 of R.A. No. 7432, and, thus, is null and void for being inconsistent with
the very statute it seeks to implement.
The Commissioner of Internal Revenue, on the other hand, 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.
The Commissioner likewise pointed out that the provision in question employs the
word may, thereby implying that the availability of the remedy of tax credit is
not absolute and mandatory and it does not confer an absolute right on the taxpayer
to avail of the tax credit scheme if he so chooses. The Commissioner further stated
that in statutory construction, the contemporaneous construction of a statute by

executive officers of the government whose duty is to execute it is entitled to great

respect and should ordinarily control in its interpretation.
Thus, addressing the matter of the proper construction of Section 4(a) of
R.A. No. 7432 regarding the treatment of the 20% sales discount given to senior
citizens on their medicine purchases, the 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. 2-94 or as a
tax credit deductible from the tax due.
In its Decision, dated August 27, 1998, the CTA declared that:
x x x
Revenue Regulations No. 2-94 gave a new meaning to the phrase
tax credit, interpreting it to mean that the 20% discount granted to
qualified senior citizens is an amount deductible from the
establishments gross sales, which is completely contradictory to the
literal or widely accepted meaning of the said phrase, as an amount
subtracted from an individuals or entitys tax liability to arrive at the
total tax liability (Blacks Law Dictionary).
In view of such apparent discrepancy in the interpretation of the
term tax credit, the provisions of the law under R.A. 7432 should
prevail over the subordinate regulation issued by the respondent under
Revenue Regulation No. 2-94. x x x
Having settled the legal issue involved in the case at bar, We are
now tasked to resolve the factual issues of whether or not petitioner is
entitled to the claim for refund of its overpaid income taxes for the years
1993 and 1994 based on the evidence at hand.
Contrary to the findings of the independent CPA, aside from the
unverifiable 20% sales discounts in the amount of P18,653.70 (Exh. R3), the Court noted some material discrepancies. Not all the details listed
in the 1994 Summary of Sales and Discounts Given to Senior Citizens
correspond with the cash slips presented. There are various sales
discounts granted which were not properly computed and there were also
some cash slips left unsigned by the buyers.

xxx
After a careful scrutiny of the documents presented, the Court,
allows only the amount of sales discounts duly supported by the premarked cash slips x x x.
Hence, only the above amounts which are properly documented
can be used as base in computing for the cost of 20% discount as tax
credit. The overpaid income tax therefore is computed as follows: [3]
For 1993
Net
Sales
Add:
Citizens
Gross
Sales

20%

P31,080,508.00
to
Senior

Discount
80,330.00

P31,160,838.00

Less: Cost of Sales

Merchandise Inventory, beg.
P 4,226,588.00
Add Purchases
29,234,361.00
Total Goods available for Sale
P33,460,947.00
Less: Merchandise Inventory, End P 4,875.944.00
Gross
Income
Less:
Expenses
Net Operating Income
Add:
Income
Net Income
Less: Interest Income Subject to Final Tax
Net Taxable Income
Tax Due (P920,884 x 35%)
Less: 1) Tax Credit (Cost of 20% Discount)
[(28,585,003.00/31,160,838.00)
x 80,330.34]
P

P28,585,003.00

P 2,575,835.00
Operating
1,706,491.00
P

869,344.00
Miscellaneous

P
P

942,024.00
21,140.00
920,884.00

322,309.40

72,680.00

73,690.03

2) Income Tax Payment for the Year

AMOUNT
REFUNDABLE

294,194.00

367,884.03

45,574.63

For 1994
Net
Sales
Add: 20% Discount to Senior Citizens
Gross Sales
Less: Cost of Sales
Merchandise Inventory, beg.
P
Add Purchases
Total Goods available for Sales
Less: Merchandise Inventory, End

P 29,904,734.00
515,000.00
P 30,419,734.00
4,875,944.00
28,138,103.00
P 33,014,047.00
5,036.117.00

Gross
Income
Less: Operating Expenses
Net Operating Income
Add: Miscellaneous Income
Net Income
Less: Interest Income Subject to Final Tax
Net Taxable Income

27,977,930.00

P 2,441,804.00
1,880,153.00
P
561,651.00
82,207.00
P
643,858.00
30,618.00
P 613,240.00

Tax Due (613,240 x 35%)

P 214,634.00
Less: 1) Tax Credit (Cost of 20% Discount)
[(28,585,003.00/31,160,838.00) x
80,330.34]
P316,156.48
2) Income Tax Payment for the Year
34,384.00
P 350,540.48
AMOUNT REFUNDABLE
P 135,906.48
WHEREFORE, in view of all the foregoing, petitioners claim for
refund is hereby partially GRANTED. Respondent is hereby ORDERED
to REFUND, or in the alternative, to ISSUE a tax credit certificate in
favor of the petitioner the amounts of P45,574.63 and P135,906.48,
representing overpaid income tax for the years 1993 and 1994,
respectively.
SO ORDERED.[4]

Both the Commissioner and petitioner moved for a reconsideration of the

above decision. Petitioner, in its Motion for Partial Reconsideration, claimed that
the cost that private establishments may claim as tax credit under Section 4 of
R.A. No. 7432 should be construed to mean the full amount of the 20% sales
discount granted to senior citizens instead of the formula --[Tax Credit = Cost of
Sales/Gross Sales x 20% discount] used by the CTA in computing for the amount
of the tax credit. In view of this, petitioner prayed for the refund of the amount of
income tax it allegedly overpaid in the aggregate amount of P45,574.63
and P135,906.48, respectively, for the taxable years 1993 and 1994 as a result of
treating the sales discount of 20% as a tax deduction rather than as a tax credit.
The Commissioner, on the other hand, moved for a re-computation of
petitioners tax liability averring that the sales discount of 20% should be deducted
from gross income to arrive at the taxable income. Such discount cannot be
considered a tax credit because the latter, being in the nature of a tax refund, is
treated as a return of tax payments erroneously or excessively

assessed and collected as provided under Section 204(3) of the Tax Code, to wit:
(3)
x x x No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the Commissioner a
claim for credit or refund within two (2) years after the payment of the
tax or penalty.

In its Resolution, dated December 7, 1998, the CTA modified its earlier
decision, thus:
ACCORDINGLY, the petitioners Motion for Partial
Reconsideration is hereby GRANTED. Respondent is hereby
ORDERED to ISSUE tax credit certificates in favor of petitioner [in] the
amounts of P45,574.63 and P135,906.48 representing overpaid income
tax for the years 1993 and 1994, as prayed for in its motion. On the other
hand, the Respondents Motion for Reconsideration is DENIED for lack
of merit.

SO ORDERED.[5]

Consequently, the Commissioner filed a petition for review with the Court of
Appeals asking for the reversal of the CTA Decision and Resolution.
The Court of Appeals rendered its assailed Decision on October 19, 1999,
the dispositive portion of which reads:
WHEREFORE, in view of the foregoing premises, the petition is
hereby GRANTED IN PART. The resolution issued by the Court of Tax
Appeals dated December [7], 1998 is SET ASIDE and the Decision
rendered by the latter is AFFIRMED IN TOTO.
No costs.
SO ORDERED.[6]

Hence, 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, THE ACQUISITION COST RATHER
THAN THE ACTUAL DISCOUNT GRANTED TO SENIOR
CITIZENS SHOULD BE THE BASIS.[7]

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

the grant of twenty percent (20%) discount from all

establishments relative to utilization of transportation services,

hotels and similar lodging establishments, restaurants and

recreation centers and purchase of medicines anywhere in the
country: Provided, That private establishments may claim
the cost[8] as tax credit.

The term cost in the above provision refers to the amount of the 20%
discount extended by a private establishment to senior citizens in their purchase of
medicines. This amount shall be applied as a tax credit, and may be deducted from
the tax liability of the entity concerned. If there is no current tax due or the
establishment reports a net loss for the period, the credit may be carried over to the
succeeding taxable year. This is in line with the interpretation of this Court
inCommissioner of Internal Revenue v. Central Luzon Drug Corporation [9] wherein
it affirmed that R.A. No. 7432 allows private establishments to claim as tax credit
the amount of discounts they grant to senior citizens.
The Court notes that petitioner, while praying for the reinstatement of the
CTA Resolution, dated December 7, 1998, directing the issuance of tax certificates
in favor of petitioner for the respective amounts of P45,574.63 and P135,906.48
representing overpaid income tax for 1993 and 1994, asks for the refund of the
same.[10]
In this regard, petitioners claim for refund must be denied. The law
expressly provides that the discount given to senior citizens may be claimed as a
tax credit, and not a refund. Thus, where the words of a statute are clear, plain and
free from ambiguity, it must be given its literal meaning and applied without
attempted interpretation.[11]
WHEREFORE, the petition is PARTLY GRANTED. The Decision and
Resolution of the Court of Appeals, dated October 19, 1999 and February 18, 2000,
respectively, in CA-G.R SP No. 49946 are REVERSED and SET ASIDE. The
Resolution of the Court of Tax Appeals, dated December 7, 1998, directing the
issuance of tax credit certificates in favor of petitioner in the amounts
of P45,574.63 and P135,906.48 is hereby REINSTATED. No costs.
SO ORDERED.

ADOLFO S. AZCUNA
Associate Justice
WE CONCUR:

REYNATO S. PUNO
Chairperson
Associate Justice

ANGELINA SANDOVAL-GUTIERREZ
Associate Justice

RENATO C. CORONA
Associate Justice

CANCIO C. GARCIA
Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision were reached in
consultation before the case was assigned to the writer of the opinion of the Courts
Division.

REYNATO S. PUNO
Associate Justice
Chairperson, Second Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division
Acting Chairpersons Attestation, it is hereby certified that the conclusions in the
above Decision had been reached in consultation before the case was assigned to
the writer of the opinion of the Courts Division.

ARTEMIO V. PANGANIBAN
Chief Justice