Deductions

G.R. No.
L-12954
February 28, 1961
COLLECTOR
OF
INTERNAL
vs.
ARTHUR HENDERSON, respondent.
x---------------------------------------------------------x
G.R. No. L-13049
February 28, 1961
ARTHUR
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
REVENUE, petitioner,
(Exhibits 1, 3, 5, 7, 9, A, F, J, N, R). In due time the taxpayers received from the Bureau of Internal
Revenue assessment notices Nos. 15804-48, 25450-49, 15255-50, 25705-51 and 22527-52 and paid the
amounts assessed as follows:
1948:
HENDERSON, petitioner,
14 May 1949, O.R. No. 52991, Exhibit B ......

12 September 1950, O.R. No. 160473, Exhibit B-1 .
PADILLA, J.:
P2,068.12
2,068.11
Total Paid .........................................................
P4,136.23
13 May 1950, O.R. No. 232366, Exhibit G ...........
P2,314.95
1949:
These are petitioner filed by the Collector of Internal Revenue (G.R. No. L-12954) and by Arthur
Henderson (G.R. No. L-13049) under the provisions of section 18, Republic Act No. 1125, for review
of a judgment dated 26 June 1957 and a resolution dated 28 September 1957 rendered and adopted
by the Court of Tax Appeals in Case No. 237.
The spouses Artuhur Henderson and Marie B. Henderson (later referred to as the taxpayers) filed
with the Bureau of Internal Revenue returns of annual net income for the years 1948 to 1952,
inclusive, where the following net incomes, personal exemptions and amounts subject to tax appear:
15 September 1950, O.R. No. 247918, Exhibit G-1 .
Less:Personal Exemption ..............................
Net Income .......................................................
P31,817.66
1949:
P29,317.66
Net Income .......................................................
P34,815.74
Amount subject to tax .......................................
3,000.00
Amount withheld from salary and paid by employer .
P5,780.40
15 May 1952, O.R. No. 33250, Exhibit O .................
360.50
361.20
Total Paid .........................................................
P6,502.10
Amount withheld from salary and paid by employer .
P5,660.40
18 May 1953, O.R. No. 438026, Exhibit T ..
1,160.30
13 August 1953, O.R. No. 443483, Exhibit T-1 .....

Total Paid .........................................................
1950:
P7,273.00
1952:
2,500.00
27 April 1951, O.R. No. 323173, Exhibit K ....
15 August 1952, O.R. No. 383318, Exhibit O-1 ....
2,500.00
P27,073.79
P4,629.89
1951:
P29,573.79
Total Paid .........................................................

1950:
1948:
Net Income .......................................................
2,314.94
1,160.30
P7,981.00
On 28 November 1953, after investigation and verification, the Bureay of Internal Revenue
reassessed the taxpayers'income for the years 1948 to 1952, inclusive, as follows:
P31,815.74
1948:
1951:
Net Income ........................................................
P32,605.83
3,000.00
P29,605.83
Net Income .......................................................
P36,780.11
1952:

3,000.00
P33,780.11
Net income per return ..................................
P29,573.79
Add:
Rent expense ...........................................................
7,200.00
Additional bonus for 1947 received May 13, 1948 .
6,500.00
Other income:
Manager's residential expense (2/29/48 a/c/#4.51)
1,400.00
Manager's residential expense (refer to 1948 P & L) ..
1,849.32
Entrance fee Marikina Gun & Country Club ....

Net income per investigation ............................................
200.00
P46,723.11
Less: Personal exemption ................................................
2,500.00
Net taxable income ..........................................................
P44,223.11
Amount of income subject to tax ....................................
Tax due thereon ...............................................................
P8,562.47
Tax due thereon ................................................................
Less: Amount of tax already paid per OR #52991 & 160473

..
Deficiency tax still due & assessable ............................
4,136.23
P4,426.24
1949:
Less: Personal exemption .................................................
Less: tax already assessed and paid per O.R.

& 383318 .......................
3,000.00
P35,388.74
P 8,560.00
Nos.
A33250
6,502.00
Deficiency tax due ..................
P2,058.00
1952:
P31,817.66
Add: disallowances
P36,780.11
Add:
Capital loss (no capital gain) ...................
P3,248.84
Withholding tax paid by company .....................................
600.00
Undeclared bonus .....................
3,857.75
Travelling allowances .......................................................
3,247.40
Rental allowance from A.I.U. ...................
1,800.00
Subsistence allowance from A.I.U. ...

6,051.30
Allowances for rent, telephone, water, electricity, etc. .....

14,958.09
P46,775.75
2,500.00
P44,672.18
P12,089.00
Tax due thereon ................................................................
Tax due thereon ................................................................
P8,292.21
Less: Tax already withheld
Deficiency tax due .............................................................
P3,662.23
(Should be) ......................................................................
3,662.32
3,000.00
Net taxable income ..................................
43,275.75
4,629.89
P47,672.18
Amount of income subject to tax ...................................
Less: tax already assessed & paid per OR Nos. 232366 & 247918
7,044.67
Tax already paid per O.R. Nos. #438026, 443484

Deficiency tax still due & collectible ...............................
P5,660.40
2,320.60
7,981.00
P4,108.00
(Exhibits 2, 4, 6, 8, 10) and demanded payment of thedeficiency taxes on or before 28 February 1954
with respectto those due for the years 1948, 1949, 1950 and 1952and on or before 15 February 1954
with respect to thatdue for the year 1951 (Exhibits B-2, H, L, P, S).
1950:
P34,815.74
Add:
Rent, electricity, water allowances .........................
8,373.73
P43,189.47
3,000.00
Net taxable income ............................................................
P40,189.47
Tax due thereon ................................................................
P10,296.00
Less: tax already paid per OR No. #323173

Deficiency tax due & assessable ...................
7,273.00
P3,023.00
1951:
Add: house rental allowance from AIU
P32,605.83
5,782.91
P83,388.74
In the foregoing assessments, the Bureau of InternalRevenue considered as part of their taxable
income thetaxpayer-husband's allowances for rental, residential expenses,subsistence, water,
electricity and telephone; bonuspaid to him; withholding tax and entrance fee to the Marikinagun
and Country Bluc paid by his employer for hisaccount; and travelling allowance of his wife. On 26
and27 January 1954 the taxpayers asked for reconsiderationof the foregoing assessment (pp. 29, 31,
BIR rec.) andon 11 Februayr 1954 and 28 February 1955 stated thegrounds and reasons in support of
their request for reconsideration (pp. 36-38, 62-66, BIR rec.). The claimthat as regards the husbandtaxpayer's allowances forrental and utilities such as water, electricity and telephone,he did not
receive the money for said allowances, but thatthey lieved in the apartment furnished and paid for
byhis employer for its convenience; that they had no choicebut live in the said apartment furnished
by his employer,otherwise they would have lived in a less expensive one;that as regards his
allowances for rental of P7,200 andresidential expenses of P1,400 and P1,849.32 in 1948, rentalof
P1,800 and subsistence of P6,051.50 (the latter merelyconsisting of allowances for rent and utilities
such as light,water, telephone, etc.) in 1949 rental, electricity and waterof P8,373.73 in 1950, rental of
P5,782.91 in 1951 and rental,telephone, water, electricity, etc. of P7,044.67 in 1952, onlythe amount of
P3,900 for each year, which is the amountthey would have spent for rental of an apartment
includingutilities, should be taxed; that as regards the amount ofP200 representing entrance fee to
the Marikina Gun andCountry Club paid for him by his employer in 1948, thesame should not be
considered as part of their income forit was an expense of his employer and his membershiptherein
was merely incidental to his duties of increasingand sustaining the business of his employer; and
that asregards the wife-taxpayer's travelling allowance of P3,247.40 in 1952, it should not be
considered as part of theirincome because she merely accompanied him in his businesstrip to New
York as his secretary and, at the behestof her husband's employer, to study and look into the
detailsof the plans and decorations of the building intendedto be constructed byn his employer in its
property at DeweyBoulevard. On 15 and 27 February 1954, the taxpayerspaid the deficiency taxes
assessed under Official ReceiptsNos. 451841, 451842, 451843, 451748 and 451844 (ExhibitsC, I, M, Q,
and Y). After hearing conducted by theConference Staff of the Bureau of Internal Revenue on5
October 1954 (pp. 74-85, BIR rec.), on 27 May 1955the Staff recommended to the Collector of Internal
Revenuethat the assessments made on 28 November 1953 (Exhibits2, 4, 6, 8, 10) be sustained except
that the amountof P200 as entrance fee to the Marikina Gun and CountryClub paid for the husbandtaxpayer's account by his employerin 1948 should not be considered as part of thetaxpayers' taxable
income for that year (pp. 95-107, BIRrec.). On 14 July 1955, in line with the recommendationof the
Conference Staff, the Collector of Internal Revenuedenied the taxpayers' request for reconsideration,
exceptas regards the assessment of their income tax due for theyear 1948, which was modified as
follows:
Net income per return
P29,573.79
Add: Rent expense
7,200.00
Additional bonus for 1947 received on May

13, 1948
6,500.00
Manager's residential expense (2/29/48 a/c
#4.41)
1,400.00
Manager's residential expense (1948 profit
and loss)
Net income per investigation
Less: Personal exemption
2,500.00
P44,023.11
Tax due thereon
P 8,506.47
Deficiency tax still due
The Collector of Internal Revenue had assigned the followingerrors allegedly committed by the
Court of TaxAppeals:
1,849.32
P46,523.11
Net taxable income

Less; Amount already paid
suppliedby his employer-corporation;" that, however, onlythe amount of P4,800 annually, the
ratable value to him ofthe quarters furnished constitutes a part of taxable income;that since the
taxpayers did not receive any benefitout of the P3,247.40 traveling expense allowance grantedin 1952
to the wife-taxpayer and that she merely undertookthe trip abroad at the behest of her husband's
employer,the same could not be considered as income; andthat even if it were considered as such,
still it could not besubject to tax because it was deductible as travel expense;and ordering the
Collector of Internal Revenue to refundto the taxpayers the amount of P5,109.33 with interestfrom 27
February 1954, without pronouncement as tocosts. The taxpayers filed a motion for
reconsiderationclaiming that the amount of P5,986.61 is the amount refundableto them because the
amounts of P1,400 and P1,849.32 as manager's residential expenses in 1948 shouldnot be included in
their taxable net income for the reasonthat they are of the same nature as the rentals for
theapartment, they being mainly expenses for utilities aslight, water and telephone in the apartment
furnished bythe husbant-taxpayer's employer. The Collector of InternalRevenue filed an opposition
to their motion for reconsideration.He also filed a separate motion for reconsiderationof the decision
claiming that his assessmentunder review was correct and should have been affirmed.The taxpayers
filed an opposition to this motion for reconsiderationof the Collector of Internal Revenue; thelatter, a
reply thereto. On 28 September 1957 the Courtdenied both motions for reconsideration. On 7
October1957 the Collector of Internal Revenue filed a notice ofappeal in the Court of Tax Appeals
and on 21 October1957, within the extension of time previously granted bythis Court, a petition for
review (G.R. No. L-12954). On29 October 1957 the taxpayers filed a notice of appealin the Court of
Tax Appeals and a petition for review inthis Court (G.R. No. L-13049).
4,136.23
P 4,370.24
and demanded payment of the deficiency taxes of P4,370.24for 1948, P3,662.23 for 1949, P3,023 for
1950, P2,058 for1951 and P4,108 for 1952, 5% surcharge and 1% monthlyinterest thereon from 1
March 1954 to the date of paymentand P80 as administrative penalty for late payment,to the City
Treasurer of Manila not later than 31 July1955 (Exhibit 14). On 30 January 1956 the taxpayersagain
sought a reconsideration of the denial of their requestfor reconsideration and offered to settle the
case ona more equitable basis by increasing the amount of thetaxable portion of the husbandtaxpayer's allowances forrental, etc. from P3,000 yearly to P4,800 yearly, which "isthe value to the
employee of the benefits he derived therefrommeasured by what he had saved on account thereof'in
the ordinary course of his life ... for which hewould have spent in any case'". The taxpayers also
reiteratedtheir previous stand regarding the transportationallowance of the wife-taxpayer of
P3,247.40 in 1952 andrequested the refund of the amounts of P3,477.18, P569.33,P1,294, P354 and
P2,164, or a total of P7,858.51, (Exhibit Z). On 10 February 1956 the taxpayers again requestedthe
Collector of Internal Revenue to refund to them theamounts allegedly paid in excess as income taxes
for theyears 1948 to 1952, inclusive (Exhibit Z-1). The Collectorof Internal Revenue did not take any
action on the taxpayers'request for refund.
On 15 February 1956 the taxpayers filed in the Courtof Tax Appeals a petition to review the decision
of theCollector of Internal Revenue (C.T.A. Case No. 237). Afterhearing, on 26 June 1957 the Court
rendered judgmentholding "that the inherent nature of petitioner's(the husband-taxpayer)
employment as president of theAmerican International Underwriters as president of theAmerican
International Underwriters of the Philippines,Inc. does not require him to occupy the apartments
I. The Court of Tax Appeals erred in finding that theherein respondent did not have any
choice in the selection ofthe living quarters occupied by him.
II. The Court of Tax Appeals erred in not consideringthe fact that respondent is not a
minor company official butthe President of his employer-corporation, in the
appreciationof respondent's alleged lack of choice in the matter of the selectionof the
quarters occupied by him.
III. The Court of Tax Appeals erred in giving full weightand credence to respondent's
allegation, a self-serving and unsupported declaration that the ratable value to him of the
living quarters and subsistence allowance was only P400.00 a month.
IV. The Court of Tax Appeals erred in holding that only the ratable value of P4,800.00 per
annum, or P400.00 a month constitutes income to respondent.
V. The Court of Tax Appeals erred in arbitrarily fixing the amount of P4,800.00 per
annum, or P400.00 a month as the only amount taxable aganst respondent during the five
tax years in question.
VI. The Court of Tax Appeals erred in not finding that travelling allowance in the amount
of P3,247.40 constituted income to respondent and, therefore, subject to the income tax.
VII. The Court of Tax Appeals erred in ordering the refund of the sum of P5,109.33 with
interest from February 17, 1954. (G.R. No. L-12954.)
The taxpayers have assigned the following errors allegedly committed by the Court of Tax Appeals:
I. The Court of Tax Appeals erred in its computation of the 1948 income tax and
consequently in the amount that should be refunded for that year.
II. The Court of Tax Appeals erred in denying our motion for reconsideration as contained
in its resolution dated September 28, 1957. (G.R. No. L-13049.)
The Government's appeal:
The Collector of Internal Revenue raises questions of fact. He claims that the evidence is not
sufficient to support the findings and conclusion of the Court of Tax Appeals that the quarters
occupied by the taxpayers were not of their choice but that of the husband-taxpayer's employer; that
it did not take into consideration the fact that the husband-taxpayer is not a mere minor company
official, but the highest executive of his employer-corporation; and that the wife-taxpayer's trip
abroad in 1952 was not, as found by the Court, a business but a vacation trip. In Collector of Internal
Revenue vs. Aznar, 56, Off. Gaz. 2386, this Court held that in petitions for review under section 18,
Republic Act No. 1125, it may review the findings of fact of the Court of Tax Appeals.
The determination of the main issue in the case requires a review of the evidence. Are the
allowances for rental of the apartment furnished by the husband-taxpayer's employer-corporation,
including utilities such as light, water, telephone, etc. and the allowance for travel expenses given by
his employer-corporation to his wife in 1952 part of taxable income? Section 29, Commonwealth Act
No. 466, National Internal Revenue Code, provides:
"Gross income" includes gains, profits, and income derived from salaries, wages, or compensation
for personal service of whatever kind and in whatever form paid, or from professions, vocations,
trades, businesses, commerce, sales, or dealings in property, whether real or personal,
growing out of the ownership or use of or interest in such property; also from interest,
rents dividend, securities, or the transaction of any business carried on for gain or profit,
or gains, profits, and income derived from any source whatever. (Emphasis ours.)
The Court of Tax Appeals found that the husband-taxpayer "is the president of the American
International Underwriters for the Philippines, Inc., a domestic corporation engaged in insurance
business;" that the taxpayers "entertained officials, guests and customers of his employercorporation, in apartments furnished by the latter and successively occupied by him as president
thereof; that "In 1952, petitioner's wife, Mrs. Marie Henderson, upon request o Mr. C. V. Starr,
chairman of the parent corporation of the American International Underwriters for the Philippines,
Inc., undertook a trip to New York in connection with the purchase of a lot in Dewey Boulevardby
petitioner's employer-corporatio, the construction of a building thereon, the drawing of prospectus
and plans for said building, and other related matters."
Arthur H. Henderson testified that he is the President of American International Underwriters for
the Philippines, Inc., which representa a group of American insurance companies engagad in the
business of general insurance except life insurance; that he receives a basic annual salary of P30,000
and allowance for house rental and utilities like light, water, telephone, etc.; that he and his wife are
childless and are the only two in the family; that during the years 1948 to 1952, they lived in
apartments chosen by his employer; that from 1948 to the early part of 1950, they lived at the
Embassy Apartments on Dakota Street, Manila, where they had a large sala, three bedrooms, dining
room, two bathrooms, kitchen and a large porch, and from the early part of 1950 to 1952, they lived
at the Rosaria Apartments on the same street where they had a kitchen, sala, dining room two
bedrooms and bathroom; that despite the fact that they were the only two in the family, they had to
live in apartments of the size beyond their personal needs because as president of the corporation,
he and his wife had to entertain and put up houseguests; that during all those years of 1948 to 1952,
inclusive, they entertained and put up houseguests of his company's officials, guests and customers
such as the president of C, V. Starr & Company, Inc., who spent four weeks in his apartment,
Thomas Cocklin, a lawyer from Washington, D.C., and Manuel Elizalde, a stockholder of AIUPI;
that were he not required by his employer to live in those apartments furnished to him, he and his
wife would have chosen an apartment only large enough for them and spend from P300 to P400
monthly for rental; that of the allowances granted to him, only the amount of P4,800 annually, the
maximum they would have spent for rental, should be considered as taxable income and the excess
treated as expense of the company; and that the trip to New York undertaken by his wife in 1952, for
which she was granted by his employer-corporation travelling expense allowance of P3,247.40, was
made at the behest of his employer to assist its architect in the preparation of the plans for a
proposed building in Manila and procurement of supplies and materials for its use, hence the said
amount should not be considered as part of taxable income. In support of his claim, letters written
by his wife while in New York concerning the proposed building, inquiring about the progress
made in the acquisition of the lot, and informing him of the wishes of Mr. C. V. Starr, chairman of
the board of directors of the parent-corporation (Exhibits U-1, U-1-A, V, V-1 and W) and a letter
written by the witness to Mr. C. V. Starr concerning the proposed building (Exhibits X, X-1) were
presented in evidence.
Mrs. Marie Henderson testified that for almost three years, she and her husband gave parties every
Friday night at their apartment for about 18 to 20 people; that their guests were officials of her
husband's employer-corporation and other corporations; that during those parties movies for the
entertainment of the guests were shown after dinner; that they also entertained during luncheons
and breakfasts; that these involved and necessitated the services of additional servants; and that in
1952 she was asked by Mr. C. V. Starr to come to New York to take up problems concerning the
proposed building and entertainment because her husband could not make the trip himself, and
because "the woman of the family is closer to those problems."
The evidence presented at the hearing of the case substantially supports the findings of the Court of
Tax Appeals. The taxpayers are childless and are the only two in the family. The quarters, therefore,
that they occupied at the Embassy Apartments consisting of a large sala, three bedrooms, dining
room, two bathrooms, kitchen and a large porch, and at the Rosaria Apartments consisting of a
kitchen, sala dining room, two bedrooms and a bathroom, exceeded their personal needs. But the
exigencies of the husband-taxpayer's high executive position, not to mention social standing,
demanded and compelled them to live in amore spacious and pretentious quarters like the ones they
had occupied. Although entertaining and putting up houseguests and guests of the husbnadtaxpayer's employer-corporation were not his predominand occupation as president, yet he and his
wife had to entertain and put up houseguests in their apartments. That is why his employercorporation had to grant him allowances for rental and utilities in addition to his annual basic salary
to take care of those extra expenses for rental and utilities in excess of their personal needs. Hence,
the fact that the taxpayers had to live or did not have to live in the apartments chosen by the
husband-taxpayer's employer-corporation is of no moment, for no part of the allowances in question
redounded to their personal benefit or was retained by them. Their bills for rental and utilities were
paid directly by the employer-corporation to the creditors (Exhibit AA to DDD, inclusive; pp. 104,
170-193, t.s.n.). Neverthelss, as correctly held by the Court of Tax Appeals, the taxpayers are entitled
only to a ratable value of the allowances in question, and only the amount of P4,800 annually, the
reasonable amount they would have spent for house rental and utilities such as light, water,
telephone, etc., should be the amount subject to tax, and the excess considered as expenses of the
corporation.
Likewise, the findings of the Court of Tax Appeals that the wife-taxpayer had to make the trip to
New York at the behest of her husband's employer-corporation to help in drawing up the plans and
specificatins of a proposed building, is also supported by the evidence. The parts of the letters
written by the wife-taxpayer to her husband while in New York and the letter written by the
husband-taxpayer to Mr. C. V. Starr support the said findings (Exhibits U-2, V-1, W-1, X). No part of
the allowance for travellking expenses redounded to the benefit of the taxpayers. Neither was a part
thereof retained by them. The fact that she had herself operated on for tumors while in New York
wsa but incidental to her stay there and she must have merely taken advantage of her presence in
that city to undergo the operation.
The taxpayers' appeal:
The taxpayers claim that the Court of Tax Appeals erred in considering the amounts of P1,400 and
P1,849.32, or a total of P3,249.32, for "manager's residential expense" in 1948 as taxable income
despite the fact "that they were of the same nature as the rentals for the apartment, they being
expenses for utilities, such as light, water and telephone necessarily incidental to the apartment
furnished to him by his employer."
Mrs. Crescencia Perez Ramos, an examiner of the Bureau of Internal Revenue who examined the
books of accound of the American International Underwriters for the Philippines, Inc., testified that
he total amount of P3,249.32 was reflected in its books as "living expenses of Mr. and Mrs. Arthur
Henderson in the quarters they occupied in 1948;" and that "the amount of P1,400 was included as
manager's residential expense while the amount of P1,849.32 was entered as profit and loss account."
Buenaventura Loberiza, acting head of the accouting department of the American International
Underwriters for the Philippines, Inc., testified that rentals, utilities, water, telephone and electric
bills of executives of the corporation were entered in the books of account as "subsistence allowances
and expenses;" that there was a separate account for salaries and wages of employees and officers;
and that expenses for rentals and other utilities were not charged to salary accounts.
The taxpayers' claim is supported by the evidence. The total amount of P3,249.32 "for manager's
residential expense" in 1948 should be treated as rentals for apartments and utilities and should not
form part of the ratable value subject to tax.
The computation made by the taxpayers is correct. Adding to the amount of P29,573.79, their net
income per return, the amount of P6,500, the bonus received in 1948, and P4,800, the taxable ratable
value of the allowances, brings up their gross income to P40,873.79. Deducting therefrom the
amount of P2,500 for personal exemption, the amount of P38,373.79 is the amount subject to income
tax. The income tax due on this amount is P6,957.19 only. Deducting the amount of income tax due,
P6,957.19, from the amount already paid, P8,562.47 (Exhibits B, B-1, C), the amount of P1,605.28 is
the amount refundable to the taxpayers. Add this amount to P563.33, P1,294.00, P354.00 and
P2,154.00, refundable to the taxpayers for 1949, 1950, 1951 and 1952 and the total is P5,986.61.
The judgment under review is modified as above indicated. The Collector of Internal Revenue is
ordered to refund to the taxpayers the sum of P5,986.61, without pronouncement as to costs.
G.R. No. 159647 April 15, 2005

COMMISSIONER
OF
INTERNAL
REVENUE, Petitioners,
vs.
CENTRAL LUZON DRUG CORPORATION, Respondent.
DECISION
PANGANIBAN, J.:
The 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely
a tax deductionfrom 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 atax credit to all covered entities. Thus, the provisions of
the revenue regulation that withdraw or modify such grant are void. Basic is the rule that
administrative regulations cannot amend or revoke the law.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the
August 29, 2002 Decision2 and the August 11, 2003 Resolution3 of the Court of Appeals (CA) in CAGR SP No. 67439. The assailed Decision reads as follows:
"WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in toto. No
costs."4
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 Decision5 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 x x x x x x
Tax Deduction
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.
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
"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 743210 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 atax 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 credit should be understood in relation to other tax concepts. One of these is tax deduction -defined as a 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
3420 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 tax22 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 a tax
liability before the tax creditcan 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.24 For the establishment
to choose the immediate availment of a tax credit will be premature and impracticable. Nevertheless,
the irrefutable fact remains that, under RA 7432, Congress has granted without conditions a tax
credit benefit to all covered establishments.
Although this tax credit benefit is available, it need not be used by losing ventures, since there is no
tax liability that calls for its application. Neither can it be reduced to nil by the quick yet callow
stroke of an administrative pen, simply because no reduction of taxes can instantly be effected. By its
nature, the tax credit may still be deducted from a future, not a present, tax liability, without which it
does not have any use. In the meantime, it need not move. But it breathes.
Prior Tax Payments Not
Required for Tax Credit
While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On
the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax
payment is needed. The Tax Code is in fact replete with provisions granting or allowing tax credits,
even though no taxes have been previously paid.
For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain
limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is a similar
provision for 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 VATregistered 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, a tax credit may be
allowed, subject to the condition precedent that the taxpayer shall simply give a bond with sureties
satisfactory to and approved by petitioner, in such sum as may be required; and further conditioned
upon payment by the taxpayer of any tax found due, upon 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 finding32 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.34To deny such credit, despite the plain mandate of the law and the
regulations carrying out that mandate, is indefensible.
First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing
the 20 percent discount that "shall be deducted by the said establishments from their gross income for
income tax purposes and from their gross sales for value-added tax or other percentage tax
purposes."35 In ordinary business language, thetax credit represents the amount of such discount.
However, the manner by which the discount shall be credited against taxes has not been clarified by
the revenue regulations.
By ordinary acceptation, a discount is an "abatement or reduction made from 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 statement39 or financial report upon which theincome 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 discount on 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 a trade 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 -- a
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
statement50 as a line item deducted -- along with returns, allowances, rebates and other similar
expenses -- from gross sales to arrive atnet sales.51 This type of presentation is resorted to, because
the accounts receivable and sales figures that arise from sales discounts, -- as well as from quantity,
volume or bulk discounts -- are recorded in the manual and computerized books of accounts and
reflected in the financial statements at the gross amounts of the invoices. 52This 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
accounts54 and reflected in the financial statements. A separate line item cannot be shown,55 because
the transactions themselves involving bothaccounts receivable and sales have already been entered
into, net of the said discounts.
The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to
amounts whose sum -- along with sales returns, allowances and cost of goods sold56 -- is deducted
from gross sales to come up with the gross income, profit or margin57 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. After all, these two provisions affirm that sales discounts are amounts that are always
deductible from gross sales.
Reason for the Senior Citizen Discount:
The Law, Not Prompt Payment
A distinguishing feature of the implementing rules of RA 7432 is the private 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 stress, the effect of a sales discount on the income statement and income tax return of an
establishment covered by RA 7432 is different from that resulting from the availment or use of its tax
credit benefit. While the former is a deduction before, the latter is a deduction after, the income tax is
computed. As mentioned earlier, a discount is not necessarily a sales discount, and a tax credit for a
simple discount privilege should not be automatically treated like a sales discount. 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 tax purposes, or from gross sales for VAT or other percentage
tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales discount. This
contrived definition is improper, considering that the latter has to be deducted from gross sales in
order to compute the gross income in the income 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 creditbenefit 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.
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
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
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.
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
word may in
the
text
of
the
statute71 implies
that
the
availability of 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 sales74 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 revalidated75accordingly. 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
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.80Tax measures are but "enforced contributions exacted on pain of penal
sanctions"81 and "clearly imposed for apublic 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 even85 -- 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.
SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon. Can we go back
to Section 4 ha?
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:
REP. AQUINO. Oho.
"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.
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. (Rep. Unico). Tax credit.
SEN. ANGARA. 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
THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit natin?
Special Law
MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the microphone).
Over General Law
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). Yung ang proposal ni Senator Shahani, e.
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?
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 a
presumption that the special is to be considered as remaining an exception to the general, 91 one as a
general law of the land, the other as the law of a particular case." 92 "It is a canon of statutory
construction that a later statute, general in its terms and not expressly repealing a prior special statute,
will ordinarily not affect the special provisions of such earlier statute." 93
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 Code94 be made to
restrict RA 7432. No provision of any revenue regulation can supplant or modify the acts of
Congress.
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.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court of
Appeals AFFIRMED. No pronouncement as to costs.
REP. AQUINO. Ano ba yung establishments na covered?
SO ORDERED.
SEN. ANGARA. Restaurant lodging houses, recreation centers.
G.R. No. 148512
REP. AQUINO. All establishments covered siguro?
June 26, 2006
COMMISSIONER
OF
INTERNAL
vs.
CENTRAL LUZON DRUG CORPORATION, Respondent.
DECISION
AZCUNA, J.:
REVENUE, Petitioner,
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. 2-941 implementing R.A. No. 7432, which states that the
discount given to senior citizens shall be deducted by the establishment from its gross sales for
value-added tax and other percentage tax purposes, respondent deducted the total amount
of P219,778 from its gross income for the taxable year 1995. For said taxable period, respondent
reported a net loss of P20,963 in its corporate income tax return. As a consequence, respondent did
not pay income tax for 1995.
Subsequently, on December 27, 1996, claiming that according to Sec. 4(a) of R.A. No. 7432, the
amount ofP219,778 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:
219,778.00
Cost of 20% Discount to Senior Citizens
Gross Sales
Less:
P 37,234,585.00
Cost of Sales
Merchandise Inventory, beg
P 1,232,740.00
Purchases
41,145,138.00
Merchandise Inventory, end

Gross Profit
8,521,557.00
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
-0-
Tax Refundable/Overpaid Income Tax
(P 150,193.00)
As shown above, the amount of P150,193 claimed as a refund represents the tax credit allegedly due
to respondent under R.A. No. 7432. Since the Commissioner of Internal Revenue "was not able to
decide the claim for refund on time,"2 respondent filed a Petition for Review with the Court of Tax
Appeals (CTA) on March 18, 1998.
On April 24, 2000, the CTA dismissed the petition, declaring that even if the law treats the 20% sales
discounts granted to senior citizens as a tax credit, the same cannot apply when there is no tax
liability or the amount of the tax credit is greater than the tax due. In the latter case, the tax credit
will only be to the extent of the tax liability.3Also, no refund can be granted as no tax was
erroneously, illegally and actually collected based on the provisions of Section 230, now Section 229,
of the Tax Code. Furthermore, the law does not state that a refund can be claimed by the private
establishment concerned as an alternative to the tax credit.
Thus, respondent filed with the CA a Petition for Review on August 3, 2000.
On May 31, 2001, the CA rendered a Decision stating that Section 229 of the Tax Code does not
apply in this case. It concluded that the 20% discount given to senior citizens which is treated as a
tax credit pursuant to Sec. 4(a) of R.A. No. 7432 is considered just compensation and, as such, may
be carried over to the next taxable period if there is no current tax liability. In view of this, the CA
held:
WHEREFORE, the instant petition is hereby GRANTED and the decision of the CTA dated 24 April
2000 and its resolution dated 06 July 2000 are SET ASIDE. A new one is entered granting petitioners
claim for tax credit in the amount of Php: 150,193.00. No costs.
SO ORDERED.4
33,856,621.00
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.
P 3,377,964.00
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:
G.R. No. 142299
(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.
BICOLANDIA
DRUG
CORPORATION
(FORMERLY
COPRORATION), Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
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
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."
Finally, for purposes of clarity, Sec. 22911 of the Tax Code does not apply to cases that fall under Sec.
4 of R.A. No. 7432 because the former provision governs exclusively all kinds of refund or credit of
internal revenue taxes that were erroneously or illegally imposed and collected pursuant to the Tax
Code while the latter extends the tax credit benefit to the private establishments concerned even
before tax payments have been made. The tax credit that is contemplated under the Act is a form of
just compensation, not a remedy for taxes that were erroneously or illegally assessed and collected.
In the same vein, prior payment of any tax liability is not a precondition before a taxable entity can
benefit from the tax credit. The credit may be availed of upon payment of the tax due, if any. Where
there is no tax liability or where a private establishment reports a net loss for the period, the tax
credit can be availed of and carried over to the next taxable year.
It must also be stressed that unlike in Sec. 229 of the Tax Code wherein the remedy of refund is
available to the taxpayer, Sec. 4 of the law speaks only of a tax credit, not a refund.
ELMAS
DRUG
DECISION
AZCUNA, J.:
This is a petition for review1 by Bicolandia Drug Corporation, formerly known as Elmas Drug
Corporation, seeking the nullification of the Decision and Resolution of the Court of Appeals, dated
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 facts2 of the case are as follows:
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:
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.
For 1993
No pronouncement as to costs.
June 22, 2006
Income tax benefit of tax credit
100%
Income tax benefit of tax deduction
35%
Differential
65%
20% discount granted in 1993
P80,330
Multiply by 65%
x 65%
Overpaid corporate income tax
P52,215
20% discount granted in 1993
P515,000
Multiply by 65%
x 65%
Overpaid corporate income tax
P334,750
For 1994
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 valueadded 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 ofP18,653.70 (Exh. R-3), the Court noted some material discrepancies. Not all the details
listed in the 1994 "Summary of Sales and Discounts Given to Senior Citizens" correspond 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 pre-marked 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
P31,080,508.00
Add:
80,330.00
20% Discount to Senior Citizens
Gross Sales
Less:
Less:
P31,160,838.00
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
Merchandise Inventory, End
P 4,875.944.00
P28,585,003.00
Gross Income
P 2,575,835.00
Less:
1,706,491.00
Operating Expenses
Net Operating Income
P 869,344.00
Add:
72,680.00
Net Income
P 942,024.00
Less:
21,140.00
Interest Income Subject to Final Tax
Net Taxable Income
P 920,884.00
Tax Due (P920,884 x 35%)

Less:
P 322,309.40
1) Tax Credit (Cost of 20% Discount)

[(28,585,003.00/31,160,838.00)
x 80,330.34]
P 73,690.03
2) Income Tax Payment for the Year
294,194.00
P 367,884.03
P 45,574.63
AMOUNT REFUNDABLE
For 1994
Net Sales
P 29,904,734.00
Add:
515,000.00
20% Discount to Senior Citizens
Gross Sales
Less:
P 30,419,734.00
Cost of Sales
Merchandise Inventory, beg.
P 4,875,944.00
Add Purchases
28,138,103.00
Total Goods available for Sales
P 33,014,047.00
Merchandise Inventory, End
5,036.117.00
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:
27,977,930.00
(3) x x x No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing
with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax
or penalty.
Gross Income
P 2,441,804.00
lawphil.net
Less:
1,880,153.00
Less:
Operating Expenses
Net Operating Income
P 561,651.00
Add:
82,207.00
In its Resolution, dated December 7, 1998, the CTA modified its earlier decision, thus:
ACCORDINGLY, the petitioners Motion for Partial Reconsideration is hereby GRANTED.
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.
Net Income
P 643,858.00
Less:
30,618.00
SO ORDERED.5
Net Taxable Income
P 613,240.00
Consequently, the Commissioner filed a petition for review with the Court of Appeals asking for the
reversal of the CTA Decision and Resolution.
Tax Due (613,240 x 35%)
P 214,634.00
Less:
Interest Income Subject to Final Tax
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
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.
COMMISSIONER
OF
INTERNAL
vs.
CENTRAL LUZON DRUG CORPORATION, respondent.
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 cost8 as tax credit.
The term "cost" in the above provision refers to the amount of the 20% discount extended by a
private establishment to senior citizens in their purchase of medicines. This amount shall be applied
as a tax credit, and may be deducted from the tax liability of the entity concerned. If there is no
current tax due or the establishment reports a net loss for the period, the credit may be carried over
to the succeeding taxable year. This is in line with the interpretation of this Court in Commissioner of
Internal Revenue v. Central Luzon Drug Corporation9 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 andP135,906.48 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.
G.R. No. 159610
June 12, 2008
REVENUE, petitioner,
DECISION
CARPIO, J.:
The Case
This petition for review on certiorari1 assails the 13 August 2003 Decision2 of the Court of Appeals in
CA-G.R. SP No. 70480. The Court of Appeals dismissed the appeal filed by the Commissioner of
Internal Revenue (petitioner) questioning the 15 April 2002 Decision3 of the Court of Tax Appeals
(CTA) in CTA Case No. 6054 ordering petitioner to issue, in favor of Central Luzon Drug
Corporation (respondent), a tax credit certificate in the amount ofP2,376,805.63, arising from the
alleged erroneous interpretation of the term "tax credit" used in Section 4(a) of Republic Act No.
(RA) 7432.4
The Facts
Respondent is a domestic corporation engaged in the retail of medicines and other pharmaceutical
products.5 In 1997, it operated eight drugstores under the business name and style "Mercury Drug."6
Pursuant to the provisions of RA 7432 and Revenue Regulations No. (RR) 2-947 issued by the Bureau
of Internal Revenue (BIR), respondent granted 20% sales discount to qualified senior citizens on
their purchases of medicines covering the calendar year 1997. The sales discount granted to senior
citizens totaled P2,798,508.00.
On 15 April 1998, respondent filed its 1997 Corporate Annual Income Tax Return reflecting a nil
income tax liability due to net loss incurred from business operations of P2,405,140.00.8 Respondent
filed its 1997 Income Tax Return under protest.9
On 19 March 1999, respondent filed with the petitioner a claim for refund or credit of overpaid
income tax for the taxable year 1997 in the amount of P2,660,829.00.10 Respondent alleged that the
overpaid tax was the result of the wrongful implementation of RA 7432. Respondent treated the 20%
sales discount as a deduction from gross sales in compliance with RR 2-94 instead of treating it as a
tax credit as provided under Section 4(a) of RA 7432.
On 6 April 2000, respondent filed a Petition for Review with the CTA in order to toll the running of
the two-year statutory period within which to file a judicial claim. Respondent reasoned that RR 294, which is a mere implementing administrative regulation, cannot modify, alter or amend the clear
mandate of RA 7432. Consequently, Section 2(i) of RR 2-94 is without force and effect for being
inconsistent with the law it seeks to implement.11
In his Answer, petitioner stated that the construction given to a statute by a specialized
administrative agency like the BIR is entitled to great respect and should be accorded great weight.
When RA 7432 allowed senior citizens' discounts to be claimed as tax credit, it was silent as to the
mechanics of availing the same. For clarification, the BIR issued RR 2-94 and defined the term "tax
credit" as a deduction from the establishment's gross income and not from its tax liability in order to
avoid an absurdity that is not intended by the law. 12
The Ruling of the Court of Tax Appeals
On 15 April 2002, the CTA rendered a Decision ordering petitioner to issue a tax credit certificate in
the amount ofP2,376,805.63 in favor of respondent.
The CTA stated that in a number of analogous cases, it has consistently ruled that the 20% senior
citizens' discount should be treated as tax credit instead of a mere deduction from gross income.13 In
quoting its previous decisions, the CTA ruled that RR 2-94 engraved a new meaning to the phrase
"tax credit" as deductible from gross income which is a deviation from the plain intendment of the
law. An administrative regulation must not contravene but should conform to the standards that the
law prescribes.14
The CTA also ruled that respondent has properly substantiated its claim for tax credit by
documentary evidence. However, based on the examination conducted by the commissioned
independent certified public accountant (CPA), there were some material discrepancies due to
missing cash slips, lack of senior citizen's ID number, failure to include the cash slips in the
summary report and vice versa. Therefore, between the Summary Report presented by respondent
and the audited amount presented by the independent CPA, the CTA deemed it proper to consider
the lesser of two amounts.
The re-computation of the overpaid income tax15 for the year 1997 is as follows:
Sales, Net
P176,742,607.00
Add: 20% Sales Discount to Senior Citizens
2,798,508.00
Sales, Gross
P179,541,115.00
Less: Cost of Sales

Merchandise inventory, beg.
P 20,905,489.00
Purchases
168,762,950.00
Merchandise inventory, end
-27,281,439.00
162,387,000.00
Gross Profit
P 17,154,115.00
Add: Miscellaneous income
402,124.00
Total Income
P 17,556,239.00
Less: Operating expenses
16,913,699.00
Net Income
Less: Income subjected to final tax (Interest
P 642,540.00
Income16)
249,172.00
Net Taxable Income
P 393,368.00
Income Tax Due (35%)
P 137,679.00
Less: Tax Credit (Cost of 20% discount as adjusted17)
2,514,484.63
Income Tax Payable
(P 2,376,805.63)
Income Tax Actually Paid

Income Tax Refundable
Aggrieved by the CTA's decision, petitioner elevated the case before the Court of Appeals.
The Ruling of the Appellate Court
0.00
(P 2,376,805.63)
On 13 August 2003, the Court of Appeals affirmed the CTA's decision in toto.
The Court of Appeals disagreed with petitioner's contention that the CTA's decision applied a literal
interpretation of the law. It reasoned that under the verba legis rule, if the statute is clear, plain, and
free from ambiguity, it must be given its literal meaning and applied without interpretation. This
principle rests on the presumption that the words used by the legislature in a statute correctly
express its intent and preclude the court from construing it differently.18
The Court of Appeals distinguished "tax credit" as an amount subtracted from a taxpayer's total tax
liability to arrive at the tax due while a "tax deduction" reduces the taxpayer's taxable income upon
which the tax liability is computed. "A credit differs from deduction in that the former is subtracted
from tax while the latter is subtracted from income before the tax is computed."19
The Court of Appeals found no legal basis to support petitioner's opinion that actual payment by the
taxpayer or actual receipt by the government of the tax sought to be credited or refunded is a
condition sine qua non for the availment of tax credit as enunciated in Section 22920 of the Tax Code.
The Court of Appeals stressed that Section 229 of the Tax Code pertains to illegally collected or
erroneously paid taxes while RA 7432 is a special law which uses the method of tax credit in the
context of just compensation. Further, RA 7432 does not require prior tax payment as a condition for
claiming the cost of the sales discount as tax credit.
Hence, this petition.
The Issues
Petitioner raises two issues21 in this Petition:
1. Whether the appellate court erred in holding that respondent may claim the 20% senior
citizens' sales discount as a tax credit deductible from future income tax liabilities instead
of a mere deduction from gross income or gross sales; and
2. Whether the appellate court erred in holding that respondent is entitled to a refund.
The Ruling of the Court
The petition lacks merit.
The issues presented are not novel. In two similar cases involving the same parties where
respondent lodged its claim for tax credit on the senior citizens' discount granted in 1995 22 and
1996,23 this Court has squarely ruled that the 20% senior citizens' discount required by RA 7432 may
be claimed as a tax credit and not merely a tax deduction from gross sales or gross income. Under
RA 7432, Congress granted the tax credit benefit to all covered establishments without conditions.
The net loss incurred in a taxable year does not preclude the grant of tax credit because by its nature,
the tax credit may still be deducted from a future, not a present, tax liability. However, the senior
citizens' discount granted as a tax credit cannot be refunded.
RA
7432
expressly
allows
private
establishments
to
claim
the
amount
of
discounts
they
grant
to
senior
citizens
as tax credit.
Section 4(a) of RA 7432 states:
SECTION 4. Privileges for the Senior Citizens. - The senior citizens shall be entitled to the
following:
a) the grant of twenty percent (20%) discount from all establishments relative
to the utilization of transportation services, hotels and similar lodging
establishments, restaurants and recreation centers and purchase of
medicines anywhere in the country: Provided, That private establishments
may claim the cost as tax credit; (Emphasis supplied)
However, RR 2-94 interpreted the tax credit provision of RA 7432 in this wise:
Sec. 2. DEFINITIONS. - For purposes of these regulations:
The
senior
citizens'
as a tax credit and not a refund.
xxx
i. Tax Credit - refers to the amount representing 20% discount granted to a qualified
senior citizen by all establishments relative to their utilization of transportation services,
hotels and similar lodging establishments, restaurants, drugstores, recreation centers,
theaters, cinema houses, concert halls, circuses, carnivals and other similar places of
culture, leisure and amusement, which discount shall be deducted by the said
establishments from their gross income for income tax purposes and from their gross
sales for value-added tax or other percentage tax purposes. (Emphasis supplied).
xxx
Sec. 4. Recording/Bookkeeping Requirement for Private Establishments
xxx
The amount of 20% discount shall be deducted from the gross income for income tax
purposes and from gross sales of the business enterprise concerned for purposes of the
VAT and other percentage taxes. (Emphasis supplied)
Tax credit is defined as a peso-for-peso reduction from a taxpayer's tax liability. It is a direct
subtraction from the tax payable to the government. On the other hand, RR 2-94 treated the amount
of senior citizens' discount as a tax deduction which is only a subtraction from gross income
resulting to a lower taxable income. RR 2-94 treats the senior citizens' discount in the same manner
as the allowable deductions provided in Section 34, Chapter VII of the National Internal Revenue
Code. RR 2-94 affords merely a fractional reduction in the taxes payable to the government
depending on the applicable tax rate.
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,24 the Court ruled that
petitioner's definition in RR 2-94 of a tax credit is clearly erroneous. To deny the tax credit, despite
the plain mandate of the law, is indefensible. In Commissioner of Internal Revenue v. Central Luzon
Drug Corporation, the Court declared, "When the law says that the cost of the discount may be
claimed as a tax credit, it means that the amount- when claimed shall be treated as a reduction
from any tax liability, plain and simple." The Court further stated that the law cannot be amended
by a mere regulation because "administrative agencies in issuing these regulations may not enlarge,
alter or restrict the provisions of the law it administers; it cannot engraft additional requirements not
contemplated by the legislature." Hence, there being a dichotomy in the law and the revenue
regulation, the definition provided in Section 2(i) of RR 2-94 cannot be given effect.
The
tax
credit
from a future, not a present, tax liability.
may
still
be
deducted
In the petition filed before this Court, petitioner alleged that respondent incurred a net loss from its
business operations in 1997; hence, it did not pay any income tax. Since no tax payment was made, it
follows that no tax credit can also be claimed because tax credits are usually applied against a tax
liability.25
Corporation,26
In Commissioner of Internal Revenue v. Central Luzon Drug

the Court stressed that prior
payment of tax liability is not a pre-condition before a taxable entity can avail of the tax credit. The
Court declared, "Where there is no tax liability or where a private establishment reports a net loss
for the period, the tax credit can be availed of and carried over to the next taxable year." 27 It is
irrefutable that under RA 7432, Congress has granted the tax credit benefit to all covered
establishments without conditions. Therefore, neither a tax liability nor a prior tax payment is
required for the existence or grant of a tax credit.28 The applicable law on this point is clear and
without any qualifications.29
Hence, respondent is entitled to claim the amount of P2,376,805.63 as tax credit despite incurring net
loss from business operations for the taxable year 1997.
discount
may
be
claimed
Section 4(a) of RA 7432 expressly provides that private establishments may claim the cost as a tax
credit. A tax credit can only be utilized as payment for future internal revenue tax liabilities of the
taxpayer while a tax refund, issued as a check or a warrant, can be encashed. A tax refund can be
availed of immediately while a tax credit can only be utilized if the taxpayer has existing or future
tax liabilities.
If the words of the law are clear, plain, and free of ambiguity, it must be given its literal meaning
and applied without any interpretation. Hence, the senior citizens' discount may be claimed as a tax
credit and not as a refund.30
RA
9257
now
specifically
provides
that
may claim the senior citizens' discount as tax deduction.
all
covered
establishments
On 26 February 2004, RA 9257, otherwise known as the "Expanded Senior Citizens Act of 2003," was
signed into law and became effective on 21 March 2004.31
RA 9257 has amended RA 7432. Section 4(a) of RA 9257 reads:
"Sec. 4. Privileges for the Senior Citizens. - The senior citizens shall be entitled to the
following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the
utilization of services in hotels and similar lodging establishments, restaurants and
recreation centers, and purchase of medicinesin all establishments for the exclusive use or
enjoyment of senior citizens, including funeral and burial services for the death of senior
citizens;
xxx
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax
deduction based on the net cost of the goods sold or services rendered: Provided, That the
cost of the discount shall be allowed as deduction from gross income for the same taxable
year that the discount is granted. Provided, further, That the total amount of the claimed tax
deduction net of value added tax if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper documentation and to the
provisions of the National Internal Revenue Code, as amended." (Emphasis supplied)
Contrary to the provision in RA 7432 where the senior citizens' discount granted by all covered
establishments can be claimed as tax credit, RA 9257 now specifically provides that this discount
should be treated as tax deduction.
With the effectivity of RA 9257 on 21 March 2004, there is now a new tax treatment for senior
citizens' discount granted by all covered establishments. This discount should be considered as a
deductible expense from gross income and no longer as tax credit.32 The present case, however,
covers the taxable year 1997 and is thus governed by the old law, RA 7432.
WHEREFORE, we DENY the petition. We AFFIRM the assailed Decision of the Court of Appeals
dated 13 August 2003 in CA-G.R. SP No. 70480.
No pronouncement as to costs.SO ORDERED.
G.R. No. 166494
June 29, 2007
CARLOS SUPERDRUG CORP., doing business under the name and style "Carlos Superdrug,"
ELSIE M. CANO, doing business under the name and style "Advance Drug," Dr. SIMPLICIO L.
YAP, JR., doing business under the name and style "City Pharmacy," MELVIN S. DELA SERNA,
doing business under the name and style "Botica dela Serna," and LEYTE SERV-WELL CORP.,
doing business under the name and style "Leyte Serv-Well Drugstore," petitioners,
vs.
DEPARTMENT OF SOCIAL WELFARE and DEVELOPMENT (DSWD), DEPARTMENT OF
HEALTH (DOH), DEPARTMENT OF FINANCE (DOF), DEPARTMENT OF JUSTICE (DOJ), and
DEPARTMENT OF INTERIOR and LOCAL GOVERNMENT (DILG), respondents.
DECISION
AZCUNA, J.:
This is a petition1 for Prohibition with Prayer for Preliminary Injunction assailing the
constitutionality of Section 4(a) of Republic Act (R.A.) No. 9257, 2 otherwise known as the "Expanded
Senior Citizens Act of 2003."
Petitioners are domestic corporations and proprietors operating drugstores in the Philippines.
Public respondents, on the other hand, include the Department of Social Welfare and Development
(DSWD), the Department of Health (DOH), the Department of Finance (DOF), the Department of
Justice (DOJ), and the Department of Interior and Local Government (DILG) which have been
specifically tasked to monitor the drugstores compliance with the law; promulgate the
implementing rules and regulations for the effective implementation of the law; and prosecute and
revoke the licenses of erring drugstore establishments.
The antecedents are as follows:
On February 26, 2004, R.A. No. 9257, amending R.A. No. 7432, 3 was signed into law by President
Gloria Macapagal-Arroyo and it became effective on March 21, 2004. Section 4(a) of the Act 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 the utilization of
services in hotels and similar lodging establishments, restaurants and recreation centers, and
purchase of medicines in all establishments for the exclusive use or enjoyment of senior citizens,
including funeral and burial services for the death of senior citizens;
...
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based
on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be
allowed as deduction from gross income for the same taxable year that the discount is
granted. Provided, further, That the total amount of the claimed tax deduction net of value added tax
if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to
proper documentation and to the provisions of the National Internal Revenue Code, as amended. 4
On May 28, 2004, the DSWD approved and adopted the Implementing Rules and Regulations of
R.A. No. 9257, Rule VI, Article 8 of which states:
Article 8. Tax Deduction of Establishments. The establishment may claim the discounts granted
under Rule V, Section 4 Discounts for Establishments;5 Section 9, Medical and Dental Services in
Private Facilities[,]6 and Sections 107 and 118 Air, Sea and Land Transportation as tax deduction
based on the net cost of the goods sold or services rendered. Provided, That the cost of the discount
shall be allowed as deduction from gross income for the same taxable year that the discount is
granted; Provided, further, That the total amount of the claimed tax deduction net of value added tax
if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to
proper documentation and to the provisions of the National Internal Revenue Code, as amended;
Provided, finally, that the implementation of the tax deduction shall be subject to the Revenue
Regulations to be issued by the Bureau of Internal Revenue (BIR) and approved by the Department
of Finance (DOF).9
On July 10, 2004, in reference to the query of the Drug Stores Association of the Philippines (DSAP)
concerning the meaning of a tax deduction under the Expanded Senior Citizens Act, the DOF,
through Director IV Ma. Lourdes B. Recente, clarified as follows:
1) The difference between the Tax Credit (under the Old Senior Citizens Act) and Tax Deduction
(under the Expanded Senior Citizens Act).
1.1. The provision of Section 4 of R.A. No. 7432 (the old Senior Citizens Act) grants twenty percent
(20%) discount from all establishments relative to the utilization of transportation services, hotels
and similar lodging establishment, restaurants and recreation centers and purchase of medicines
anywhere in the country, the costs of which may be claimed by the private establishments concerned
as tax credit.
Effectively, a tax credit is a peso-for-peso deduction from a taxpayers tax liability due to the
government of the amount of discounts such establishment has granted to a senior citizen. The
establishment recovers the full amount of discount given to a senior citizen and hence, the
government shoulders 100% of the discounts granted.
It must be noted, however, that conceptually, a tax credit scheme under the Philippine tax system,
necessitates that prior payments of taxes have been made and the taxpayer is attempting to recover
this tax payment from his/her income tax due. The tax credit scheme under R.A. No. 7432 is,
therefore, inapplicable since no tax payments have previously occurred.
1.2. The provision under R.A. No. 9257, on the other hand, provides that the establishment
concerned may claim the discounts under Section 4(a), (f), (g) and (h) as tax deduction from gross
income, based on the net cost of goods sold or services rendered.
Under this scheme, the establishment concerned is allowed to deduct from gross income, in
computing for its tax liability, the amount of discounts granted to senior citizens. Effectively, the
government loses in terms of foregone revenues an amount equivalent to the marginal tax rate the
said establishment is liable to pay the government. This will be an amount equivalent to 32% of the
twenty percent (20%) discounts so granted. The establishment shoulders the remaining portion of
the granted discounts.
It may be necessary to note that while the burden on [the] government is slightly diminished in
terms of its percentage share on the discounts granted to senior citizens, the number of potential
establishments that may claim tax deductions, have however, been broadened. Aside from the
establishments that may claim tax credits under the old law, more establishments were added under
the new law such as: establishments providing medical and dental services, diagnostic and
laboratory services, including professional fees of attending doctors in all private hospitals and
medical facilities, operators of domestic air and sea transport services, public railways and skyways
and bus transport services.
and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and
2) the law failed to provide a scheme whereby drugstores will be justly compensated for the
discount.
A simple illustration might help amplify the points discussed above, as follows:
Tax Deduction Tax Credit
Gross Sales x x x x x x x x x x x x
Less : Cost of goods sold x x x x x x x x x x
Net Sales x x x x x x x x x x x x
Less: Operating Expenses:
Tax Deduction on Discounts x x x x -Other deductions: x x x x x x x x
Net Taxable Income x x x x x x x x x x
Tax Due x x x x x x
Less: Tax Credit -- ______x x
Net Tax Due -- x x
As shown above, under a tax deduction scheme, the tax deduction on discounts was subtracted
from Net Sales together with other deductions which are considered as operating expenses before
the Tax Due was computed based on the Net Taxable Income. On the other hand, under a tax
credit scheme, the amount of discounts which is the tax credit item, was deducted directly from the
tax due amount.10
Meanwhile, on October 1, 2004, Administrative Order (A.O.) No. 171 or the Policies and Guidelines to
Implement the Relevant Provisions of Republic Act 9257, otherwise known as the "Expanded Senior Citizens
Act of 2003"11was issued by the DOH, providing the grant of twenty percent (20%) discount in the
purchase of unbranded generic medicines from all establishments dispensing medicines for the
exclusive use of the senior citizens.
On November 12, 2004, the DOH issued Administrative Order No 177 12 amending A.O. No. 171.
Under A.O. No. 177, the twenty percent discount shall not be limited to the purchase of unbranded
generic medicines only, but shall extend to both prescription and non-prescription medicines
whether branded or generic. Thus, it stated that "[t]he grant of twenty percent (20%) discount shall
be provided in the purchase of medicines from all establishments dispensing medicines for the
exclusive use of the senior citizens."
Examining petitioners arguments, it is apparent that what petitioners are ultimately questioning is
the validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent
(20%) discount that they extend to senior citizens.
Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse
petitioners for the discount privilege accorded to senior citizens. This is because the discount is
treated as a deduction, a tax-deductible expense that is subtracted from the gross income and results
in a lower taxable income. Stated otherwise, it is an amount that is allowed by law 15 to reduce the
income prior to the application of the tax rate to compute the amount of tax which is due. 16 Being a
tax deduction, the discount does not reduce taxes owed on a peso for peso basis but merely offers a
fractional reduction in taxes owed.
Theoretically, the treatment of the discount as a deduction reduces the net income of the private
establishments concerned. The discounts given would have entered the coffers and formed part of
the gross sales of the private establishments, were it not for R.A. No. 9257.
The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of
private property for public use or benefit.17 This constitutes compensable taking for which
petitioners would ordinarily become entitled to a just compensation.
Just compensation is defined as the full and fair equivalent of the property taken from its owner by
the expropriator. The measure is not the takers gain but the owners loss. The word just is used to
intensify the meaning of the wordcompensation, and to convey the idea that the equivalent to be
rendered for the property to be taken shall be real, substantial, full and ample.18
A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would
not meet the definition of just compensation.19
Having said that, this raises the question of whether the State, in promoting the health and welfare
of a special group of citizens, can impose upon private establishments the burden of partly
subsidizing a government program.
Petitioners assail the constitutionality of Section 4(a) of the Expanded Senior Citizens Act based on
the following grounds:13
The Court believes so.
1) The law is confiscatory because it infringes Art. III, Sec. 9 of the Constitution which provides that
private property shall not be taken for public use without just compensation;
The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to
nation-building, and to grant benefits and privileges to them for their improvement and well-being
as the State considers them an integral part of our society.20
2) It violates the equal protection clause (Art. III, Sec. 1) enshrined in our Constitution which states
that "no person shall be deprived of life, liberty or property without due process of law, nor shall
any person be denied of the equal protection of the laws;" and
The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself.
Thus, the Act provides:
3) The 20% discount on medicines violates the constitutional guarantee in Article XIII, Section 11
that makes "essential goods, health and other social services available to all people at affordable
cost."14
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of
private property. Compelling drugstore owners and establishments to grant the discount will result
in a loss of profit
SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:

SECTION 1. Declaration of Policies and Objectives. Pursuant to Article XV, Section 4 of the
Constitution, it is the duty of the family to take care of its elderly members while the State may
design programs of social security for them. In addition to this, Section 10 in the Declaration of
Principles and State Policies provides: "The State shall provide social justice in all phases of national
development." Further, Article XIII, Section 11, provides: "The State shall adopt an integrated and
comprehensive approach to health development which shall endeavor to make essential goods,
health and other social services available to all the people at affordable cost. There shall be priority
for the needs of the underprivileged sick, elderly, disabled, women and children." Consonant with
these constitutional principles the following are the declared policies of this Act:
citizens or an amount equivalent to P7.92, then it would have to sell Norvasc at P31.68 which
translates to a loss from capital of P5.89 per tablet. Even if the government will allow a tax
deduction, only P2.53 per tablet will be refunded and not the full amount of the discount which
is P7.92. In short, only 32% of the 20% discount will be reimbursed to the drugstores. 28
...
Petitioners computation is flawed. For purposes of reimbursement, the law states that the cost of the
discount shall be deducted from gross income,29 the amount of income derived from all sources
before deducting allowable expenses, which will result in net income. Here, petitioners tried to show
a loss on a per transaction basis, which should not be the case. An income statement, showing an
accounting of petitioners sales, expenses, and net profit (or loss) for a given period could have
accurately reflected the effect of the discount on their income. Absent any financial statement,
petitioners cannot substantiate their claim that they will be operating at a loss should they give the
discount. In addition, the computation was erroneously based on the assumption that their
customers consisted wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income,
not on the amount of the discount.
(f) To recognize the important role of the private sector in the improvement of the welfare of
senior citizens and to actively seek their partnership.21
To implement the above policy, the law grants a twenty percent discount to senior citizens for
medical and dental services, and diagnostic and laboratory fees; admission fees charged by theaters,
concert halls, circuses, carnivals, and other similar places of culture, leisure and amusement; fares
for domestic land, air and sea travel; utilization of services in hotels and similar lodging
establishments, restaurants and recreation centers; and purchases of medicines for the exclusive use
or enjoyment of senior citizens. As a form of reimbursement, the law provides that business
establishments extending the twenty percent discount to senior citizens may claim the discount as a
tax deduction.
The law is a legitimate exercise of police power which, similar to the power of eminent domain, has
general welfare for its object. Police power is not capable of an exact definition, but has been
purposely veiled in general terms to underscore its comprehensiveness to meet all exigencies and
provide enough room for an efficient and flexible response to conditions and circumstances, thus
assuring the greatest benefits. 22 Accordingly, it has been described as "the most essential, insistent
and the least limitable of powers, extending as it does to all the great public needs." 23 It is "[t]he
power vested in the legislature by the constitution to make, ordain, and establish all manner of
wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not
repugnant to the constitution, as they shall judge to be for the good and welfare of the
commonwealth, and of the subjects of the same."24
For this reason, when the conditions so demand as determined by the legislature, property rights
must bow to the primacy of police power because property rights, though sheltered by due process,
must yield to general welfare.25
Police power as an attribute to promote the common good would be diluted considerably if on the
mere plea of petitioners that they will suffer loss of earnings and capital, the questioned provision is
invalidated. Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of
the provision in question, there is no basis for its nullification in view of the presumption of validity
which every law has in its favor.26
Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is
unduly oppressive to their business, because petitioners have not taken time to calculate correctly
and come up with a financial report, so that they have not been able to show properly whether or
not the tax deduction scheme really works greatly to their disadvantage. 27
In treating the discount as a tax deduction, petitioners insist that they will incur losses because,
referring to the DOF Opinion, for every P1.00 senior citizen discount that petitioners would
give, P0.68 will be shouldered by them as only P0.32 will be refunded by the government by way of
a tax deduction.
To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance
drug Norvasc as an example. According to the latter, it acquires Norvasc from the distributors
at P37.57 per tablet, and retails it atP39.60 (or at a margin of 5%). If it grants a 20% discount to senior
Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of
their medicines given the cutthroat nature of the players in the industry. It is a business decision on
the part of petitioners to peg the mark-up at 5%. Selling the medicines below acquisition cost, as
alleged by petitioners, is merely a result of this decision. Inasmuch as pricing is a property right,
petitioners cannot reproach the law for being oppressive, simply because they cannot afford to raise
their prices for fear of losing their customers to competition.
The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive
pricing component of the business. While the Constitution protects property rights, petitioners must
accept the realities of business and the State, in the exercise of police power, can intervene in the
operations of a business which may result in an impairment of property rights in the process.
Moreover, the right to property has a social dimension. While Article XIII of the Constitution
provides the precept for the protection of property, various laws and jurisprudence, particularly on
agrarian reform and the regulation of contracts and public utilities, continuously serve as a reminder
that the right to property can be relinquished upon the command of the State for the promotion of
public good.30
Undeniably, the success of the senior citizens program rests largely on the support imparted by
petitioners and the other private establishments concerned. This being the case, the means employed
in invoking the active participation of the private sector, in order to achieve the purpose or objective
of the law, is reasonably and directly related. Without sufficient proof that Section 4(a) of R.A. No.
9257 is arbitrary, and that the continued implementation of the same would be unconscionably
detrimental to petitioners, the Court will refrain from quashing a legislative act. 31
WHEREFORE, the petition is DISMISSED for lack of merit.
No costs.
SO ORDERED.

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G.R. No.

14 May 1949, O.R. No. 52991, Exhibit B ......

Total Paid .........................................................

13 May 1950, O.R. No. 232366, Exhibit G ...........

15 September 1950, O.R. No. 247918, Exhibit G-1 .

Less:Personal Exemption ..............................

Net Income .......................................................

Less:Personal Exemption ..............................

Net Income .......................................................

Amount subject to tax .......................................

Amount withheld from salary and paid by employer .

15 May 1952, O.R. No. 33250, Exhibit O .................

Total Paid .........................................................

Amount withheld from salary and paid by employer .

18 May 1953, O.R. No. 438026, Exhibit T ..

13 August 1953, O.R. No. 443483, Exhibit T-1 .....

Less:Personal Exemption ..............................

Amount subject to tax .......................................

27 April 1951, O.R. No. 323173, Exhibit K ....

15 August 1952, O.R. No. 383318, Exhibit O-1 ....

Amount subject to tax .......................................

Total Paid .........................................................

Amount subject to tax .......................................

Net Income .......................................................

Less:Personal Exemption ..............................

Net income per return ..................................

Additional bonus for 1947 received May 13, 1948 .

Manager's residential expense (refer to 1948 P & L) ..

Entrance fee Marikina Gun & Country Club ....

Less: Personal exemption ................................................

Net taxable income ..........................................................

Amount of income subject to tax ....................................

Tax due thereon ...............................................................

Tax due thereon ................................................................

Less: Amount of tax already paid per OR #52991 & 160473

Less: Personal exemption .................................................

Less: tax already assessed and paid per O.R.

Deficiency tax due ..................

Net income per return ..................................

Net income per return ..................................

Capital loss (no capital gain) ...................

Withholding tax paid by company .....................................

Undeclared bonus .....................

Travelling allowances .......................................................

Rental allowance from A.I.U. ...................

Subsistence allowance from A.I.U. ...

Allowances for rent, telephone, water, electricity, etc. .....

Tax due thereon ................................................................

Tax due thereon ................................................................

Less: Tax already withheld

Deficiency tax due .............................................................

(Should be) ......................................................................

Net taxable income ..................................

Less: Personal exemption .................................................

Amount of income subject to tax ...................................

Net income per investigation ............................................

Tax already paid per O.R. Nos. #438026, 443484

Less: Personal exemption .................................................

Net taxable income ............................................................

Tax due thereon ................................................................

Less: tax already paid per OR No. #323173

Add: Rent expense

Additional bonus for 1947 received on May

Tax due thereon