Tax Case Digest: Commissioner of Internal Revenue vs Central Luzon Drug

Corporation
G.R. No. 159647 April 15, 2005

Facts:
Respondents operated six drugstores under the business name Mercury Drug.
From January to December 1996 respondent granted 20% sales discount to
qualified senior citizens on their purchases of medicines pursuant to RA 7432
for a total of ₱ 904,769.`

On April 15, 1997, respondent filed its annual Income Tax Return declaring
therein net losses. Respondent also filed with petitioner a claim for tax
refund/credit of ₱ 904,769.00 allegedly arising from the 20% sales discount.
Unable to obtain affirmative response from petitioner, respondent elevated its
claim to the Court of Tax Appeals. The court dismissed the same but upon
reconsideration, the latter reversed its earlier ruling and ordered petitioner to
issue a Tax Credit Certificate in favor of respondent citing CA GR SP No. 60057
(May 31, 2001, Central Luzon Drug Corp. vs. CIR) citing that Sec. 229 of RA
7432 deals exclusively with illegally collected or erroneously paid taxes but that
there are other situations which may warrant a tax credit/refund.

CA affirmed Court of Tax Appeal's decision reasoning that 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.

Issue: Whether or not respondent, despite incurring a net loss, may still claim
the 20% sales discount as a tax credit.

Ruling:
Yes, it is clear that Sec. 4a of RA 7432 grants to senior citizens the privilege of
obtaining a 20% discount on their purchase of medicine from any private
establishment in the country. The latter may then claim the cost of the discount
as a tax credit. Such credit can be claimed even if the establishment operates
at a loss. A tax credit generally refers to an amount that is “subtracted directly
from one’s total tax liability.” It is an “allowance against the tax itself” or “a
deduction from what is owed” by a taxpayer to the government.
A tax credit should be understood in relation to other tax concepts. One of these
is tax deduction – which is subtraction “from income for tax purposes,” 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.” In other words, whereas a
tax credit reduces the tax due, tax deduction reduces the income subject to tax
in order to arrive at the taxable income.

A tax credit is used to reduce directly the tax that is due, there ought to be a
tax liability before the tax credit can be applied. Without that liability, any tax
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. For
the establishment to choose the immediate availment of a tax credit will be
premature and impracticable.
 G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

FACTS:
The Philippine Sugar Estate Development Company had earlier appointed Algue
as its agent, authorizing it to sell its land, factories and oil manufacturing
process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara,
Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of
the Vegetable Oil Investment Corporation, inducing other persons to invest in
it. Ultimately, after its incorporation largely through the promotion of the said
persons, this new corporation purchased the PSEDC properties. For this sale,
Algue received as agent a commission of P126, 000.00, and it was from this
commission that the P75, 000.00 promotional fees were paid to the forenamed
individuals. But the same was disallowed by the petitioner Commissioner of
Internal Revenue.

The petitioner contends that the claimed deduction of P75, 000.00 was properly
disallowed because it was not an ordinary reasonable or necessary business
expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue,
it held that the said amount had been legitimately paid by the private
respondent for actual services rendered. The payment was in the form of
promotional fees.

ISSUE:

Whether or not the Collector of Internal Revenue correctly disallowed the P75,
000.00 deduction claimed by private respondent Algue as legitimate business
expenses in its income tax returns.

RULING:
Taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance, made in accordance with law. The Supreme
Court agrees with the respondent court that the amount of the promotional fees
was not excessive. The amount of P75,000.00 was 60% of the total commission.
This was a reasonable proportion, considering that it was the payees who did
practically everything, from the formation of the Vegetable Oil Investment
Corporation to the actual purchase by it of the Sugar Estate properties.
Sec. 30 of the Tax Code: allowed deductions in the net income – Expenses - All
the ordinary and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually rendered xxx the
burden is on the taxpayer to prove the validity of the claimed deduction.
In this case, Algue Inc. has proved that the payment of the fees was
necessary and reasonable in the light of the efforts exerted by the payees in
inducing investors and prominent businessmen to venture in an experimental
enterprise and involve themselves in a new business requiring millions of pesos.
It is said that taxes are what we pay for civilization society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of one's hard
earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government.
Hence the claimed deduction by Algue Inc. was permitted under the Internal
Revenue Code and should therefore not have been disallowed by the CIR.