#36 CIR V ISABELA CULTURAL CORPORATION - LAZATIN

TOPIC: DEDUCTIONS
FACTS:
ICC, a domestic corporation, received from BIR two (2)
notices for deficiency of (1) income tax amounting to
P333, 196.86 and (2) expanded withholding tax
amounting to P4, 897.79, both for 1986.
Income tax deficiency arose from the BIR disallowance
of ICCs claimed expense deductions for professional
and security services billed to and paid by ICC in 1986
and alleged understatement of ICCs interest income
on the 3 promissory notes due to Realty Investment,
Inc. Expanded withholding tax (EWT) deficiency (with
interest and surcharge) was allegedly due to failure of
ICC to withhold 1% EWT on its claimed P244,890.00
deduction for security services.
o BIR
disallowed
expense
deductions
for
professional and security services: 1) auditing
services by SGV & Co. 2) legal services Bengzon
law office 3) El Tigre Security services
ICC sought reconsideration of the assessments on
March 1990 but received final notice before seizure
(demanding payment of amounts) on February 1995.
Thus, brought to CTA which held that petition is
premature because final notice cannot be considered
final decision appealable to tax court. CA reversed
holding that demand letter of BIR amounts to final
decision on the protested assessments and may be
questioned before CTA. SC sustained CA and remanded
case to CTA on July 2001.
On 2003, CTA decided to cancel and set aside the
assessment notices against ICC claimed deductions
were properly claimed in 1986 because it was only that
year that the bills were sent to ICC. Hence, even if
some of the services were rendered to ICC in 1984 or
1985, it could not declare the same because amounts
cannot be determined at that time.
The CTA also held that ICC did not understate its
interest income on the subject promissory notes. It
found that it was the BIR which made an

overstatement of said income when it compounded the

interest income receivable by ICC from the promissory
notes of Realty Investment, Inc., despite the absence
of a stipulation in the contract providing for a
compounded interest; nor of a circumstance, like delay
in payment or breach of contract, that would justify the
application of compounded interest.
Petition for review was filed with the CA, which
sustained CTA decision. Hence, the petition before the
SC.

ISSUE: WON the expenses for professional and security

services should be deducted from ICCs gross income- for the
auditing and legal services NO but for the security services
YES
RULING:
The requisites for deductibility of ordinary and
necessary trade, business or professional expenses,
like expenses paid for legal and auditing services are:
a) the expense must be ordinary and necessary; b) it
must have been paid or incurred during the taxable
year; c) it must have been paid or incurred in carrying
on the trade or business of the taxpayer and d) it must
be supported by receipts, records and other pertinent
papers.
The requisite that it must have been paid or incurred
during the taxable year is qualified by Sec. 45 of NIRC
which states that the deduction provide for in this title
shall be taken for the taxable year in which paid or
incurred dependent upon the method of accounting
upon the basis of which the net income is computed x
x x.
ICC uses the accrual method. RAM No. 1-2000 provides
that under the accrual method, expenses not claimed
as deductions in the current year when they are
incurred CANNOT be claimed as deduction from
income for the succeeding year. The accrual method
relies upon the taxpayers right to receive amount or
its obligation to pay them NOT the actual receipt or
payment. Amounts of income accrue where the right to

receive them become fixed, where there is created an

enforceable liability. Liabilities are accrued when fixed
and determinable in amount.
The accrual of income and expense is permitted when
the ALL-EVENTS TEST has been met. The test requires
that: 1) fixing of a right to income or liability to pay
and 2) the availability of the reasonable accurate
determination of such income or liability. It does not
require that the amount be absolutely known only that
the taxpayer has information necessary to compute
the amount with reasonable accuracy. The test is
satisfied where computation remains uncertain if its
basis is unchangeable. The amount of liability does not
have to be determined exactly, it must be determined
with reasonable accuracy.
In the case at bar, the expenses for legal services
pertain to the years 1984 and 1985. The firm has been
retained since 1960. From the nature of the claimed
deduction and the span of time during which the firm
was retained, ICC can be expected to have reasonably
known the retainer fees charged by the firm as well as
compensation for its services. Exercising due diligence,
they could have inquired into the amount of their
obligation. It could have reasonably determined the
amount of legal and retainer fees owing to their
familiarity with the rates charged.
The professional fees of SGV cannot be validly claimed
as deductions in 1986. ICC failed to present evidence
showing that even with only reasonable accuracy, it
cannot determine the professional fees which the
company would charge.

#37 CARMELINO PANSACOLA v. CIR - LACAP

TOPIC: DEDUCTIONS FROM GROSS INCOME

DOCTRINE:

FACTS:
1. Pansacola filed his income tax return for the taxable year
1997
It reflected an overpayment of P5,950
He claimed the increased amounts of personal
and additional exemptions under Sec. 35 of the
NIRC, although his certificate of income tax
withheld on compensation indicated the lesser
allowed amounts on these exemptions
2. BIR denied the claim for refund
3. CTA also denied the refund
According to the tax court, it would be absurd for
the law to allow the deduction from a taxpayers
gross income earned on a certain year of
exemptions availing on a different taxable year
4. CA denied the appeal.

PETITIONER: argued that

personal and additional exemptions are of a fixed
character based on Section 35 (A) and (B) of the NIRC
and as ruled by this Court in Umali, these personal and
additional exemptions are fixed amounts to which an
individual taxpayer is entitled
unlike other allowable deductions, the availability of
these exemptions does not depend on the taxpayers
profession, trade or business for a particular taxable
period
he insists that the increased exemptions were already
available on April 15, 1998, the deadline for filing
income tax returns for taxable year 1997, because the
NIRC was already effective
OSG:
counters that the increased exemptions were not yet
available for taxable year 1997 because all provisions
of the NIRC took effect on January 1, 1998 only

that the fixed character of personal and additional

exemptions does not necessarily mean that these were
not time bound
petitioners proposition was contrary to Section 35 (C)
of the NIRC
petitioners exemptions were determined as of
December 31, 1997 and the effectivity of the NIRC
during the period of January 1 to April 15, 1998 did not
affect his tax liabilities within the taxable year 1997

ISSUE(S): Whether increased personal and additional

exemptions under the NIRC can be availed of by the
petitioner for the purpose of computing his income tax
liability for the taxable year 1997 and thus will be entitled to
the refund.
OR STATED SIMPLY whether the exemptions under Section
35 of the NIRC, which took effect on January 1, 1998, be
availed of for the taxable year 1997.
HELD:
1. personal and additional exemptions under Section 35 of
the NIRC are fixed amounts to which certain individual
taxpayers (citizens, resident aliens) are entitled
2. PERSONAL EXEMPTIONS theoretical personal, living
and family expenses of an individual allowed to be
deducted from the gross or net income of an individual
taxpayer
3. TAXABLE YEAR means the calendar year, upon the
basis of which the net income is computed under Title II
of the NIRC
4. Section 79 (H) requires the employer to determine, on or
before the end of the calendar year but prior to the
payment of the compensation for the last payroll period,
the tax due from each employees taxable compensation
income for the entire taxable year in accordance with
Section 24 (A)
a. This is for the purpose of either withholding
from the employees December salary, or
refunding to him not later than January 25 of

the succeeding year, the difference between

the tax due and the tax withheld.
b. THEREFORE, the income subject to income
tax is the taxpayers income as derived and
computed during the calendar year, his
taxable year
5. what the law should consider for the purpose of
determining the tax due from an individual taxpayer is
his status and qualified dependents at the close of the
taxable year and not at the time the return is filed and
the tax due thereon is paid
6. In the case of petitioner, the availability of the deductions
in Sec. 35 if he is thus entitled, would be reflected on his
tax return filed on or before the 15th day of April 1999 as
mandated by Section 51 (C) (1).
7. Since the NIRC took effect on January 1, 1998, the
increased amounts of personal and additional exemptions
under Section 35, can only be allowed as deductions from
the individual taxpayers gross or net income, as the case
maybe, for the taxable year 1998 to be filed in 1999
8. Petitioners reliance in Umali is misplaced.
a. In Umali, the court adjusted the exemptions
for the benefit of the lower and middleincome taxpayers
b. despite being given authority by Section 29
(1) (4) of the National Internal Revenue Code
of 1977 to adjust these exemptions, no
adjustments were made to cover 1989
c. the exemption was a social legislation
intended to remedy the non-adjustment in
1989
9. In the case at bar, there is nothing in the NIRC that
expresses any such intent.
10.At the time petitioner filed his 1997 return and paid the
tax due thereon in April 1998, the increased amounts of
personal and additional exemptions in Section 35 were
not yet available.
11.Petitioners taxable income covers his income for the
calendar year 1997. The law cannot be given retroactive
effect.
DISPOSITIVE: PETITION DENIED. Refund was not allowed.

#38 M.E. HOLDING CORP v. CA - MERCADO

TOPIC: Senior citizens exemption
FACTS:
1. On 1996, M.E. Holding Corporation (M.E.) filed its 1995
Corporate Annual Income Tax Return, claiming the 20%
sales discount it granted to qualified senior citizens.
2. M.E. treated the discount as deductions from its gross
income in accordance with Revenue Regulation No. 2-94,
Section 2(i)1 of the BIR issued on 1993.
3. The deductions M.E. claimed amounted to P603, 424.
However, it filed the return under protest, arguing that the
discount to senior citizens should be treated as tax credit
under RA 7432, Sect. 4(a)2 and not as mere deductions
from M.E.s gross income as provided under RR 2-94.
4. M.E. sent BIR a letter-claim stating that it overpaid its
income tax owing to the BIRs erroneous interpretation of
RA 7432.
5. Due to the inaction of BIR, M.E. filed an appeal before the
CTA.
6. CTA granted refund in favor representing the overpaid
income of petitioner and ruled that 20% sales discount
granted to qualified senior citizens should be treated as
tax credit and not as item deduction from the gross
income or sales.
7. However, M.E. failed to properly support the claimed
discount with corresponding cash slips.
8. Thus, CTA reduced M.E.s claim for P603, 424 sales
discount to P362,574.57 after the CTA disallowed
P241,348.89 unsupported claims, and consequently
lowered the refundable amount to P122,195.74.
9. M.E. filed MR and argued that the tax credit should be
based on the actual discount and not on the acquisition
cost of medicines CTA denied.
10.M.E. filed petition for review CA dismissed.
ISSUE:

1 Tax credit 20% discount shall be deducted by the said establishments from their
gross income for income tax purposes.

Privileges for the Senior Citizens the senior citizens shall be entitled to the grant
of 20% discount; Provided that private establishments may claim the cost as tax
credit.

WON M.E. may claim the discount granted to qualified

senior citizens as tax credit YES.

HELD:
1. The 20% sales discount to senior citizens may be claimed
by an establishment owner as tax credit.
2. RA7432, the applicable law, is unequivocal on this.
3. The implementing RR 2094 that considers such discount
as mere deduction to the taxpayers gross income or
gross sales clearly clashes with the clear language of RA
7432.
4. We need not delve on the nullity of the implementing rule
all over again as we have already put this issue at rest in
a string of cases.
5. The determination of the exact amount M.E. claims as
20% sales discount it granted to the senior citizens calls
for an evaluation of factual matters.
6. CTA was correct in disallowing and not considering the
belatedly-submitted cash slips to be part of the 20% sales
discount for M.E.s taxable year 1995.
7. Claims for tax credit are in the nature of claims for tax
exemption.
8. The CA is not guilty of gravely abusing its discretion when
it refused to consider, in lieu of the unsubmitted
additional cash slips, the special record books which are
only secondary evidence.
9. Also, the CA noted that the belatedly offered cash slips
were presented only after the CTA had rendered its
decision.
10.In Bicolandia Drug Corp v. CIR, the term cost is defined
as the amount of the 20% discount extended by a private
establishment to senior citizens in their purchase of
medicines.
11.It is the Government that should fully shoulder the cost of
the sales discount granted to senior citizens.
12.Accordingly, M.E. is entitled to a tax credit equivalent to
the actual 20% sales discount it granted to qualified
senior citizens.
13.Given the net amount of P362,574.57 for the actual 20%
sales discount granted to qualified senior citizens properly

allowed by the CTA and fully appreciated as tax credit, the

amount dues as tax credit in favor of M.E. is P151,201.71. 3
14.We cannot agree with the CTA and CA on M.E.s
entitlement to refund.
15.RA 7432 expressly provides that the sales discount may
be claimed as tax credit, not as tax refund.
16.RA 9257, amending RA 7432, provides that the
establishment may claim the discounts granted as tax
deduction based on the net cost of the goods sold or
services rendered.
17.Starting taxable year 2004, the 20% sales discount
granted by establishments to qualified senior citizens is to
be treated as tax deduction, no longer as a tax credit.
DISPOSITIVE: Petition is partially granted.
NOTE: I only cited the important parts in the stated
provisions. Please check the whole provision

3 For the computation, refer to the full text of the case hehe

#39 CIR V CENTRAL LUZON DRUG

TOPIC: SENIOR CITIZEN
FACTS:
1. Respondent is a domestic corporation primarily
engaged in retailing of medicines and other
pharmaceutical products. In 1996, it operated 6
drugstores under the business name of Mercury Drug.
2. From Jan to Dec 1996 Respondent granted 20% sales
discount to qualified senior citizens on their purchases
of medicines pursuant to RA 7432.
a. The amount representing the 20% discount for
the seniors totaled to 904,769.
3. April 15,1997 - Respondent filed its Annual Income Tax
Return for taxable year 1996 declaring therein that it
incurred net losses from its operations.
4. January 16, 1998 respondent filed with petitioner a
claim for tax refund/credit in the amount of 904,769
from the 20% sales discount granted by respondent to
seniors in compliance with RA 742. Unable to get a
response, respondent elevated to CTA.
5. CTA: dismissed. If no tax has been paid to the govt,
erroneously or illegally, or if no amount is due and
collectible from the tax payer, tax refund or credit is
unavailing. Also, it must be first established that there
was actual collection and receipt by the government of
the tax sought to be recovered.
a. Tax credit is premised on the existence of tax
liability on the part of tax payer. No tax liability
= tax credit no available.
6. On Motion for Reconsideration, CTA reversed its
previous ruling and granted the tax credit. The ratio:
a. Sec 229 clearly does not apply in this case. The
tax refund provided under said section deals
with illegally collected or erroneously paid taxes
but there are other possible situations, such as
refund of the excess estimated corporate
quarterly income tax paid, or excess input tax
paid by VAT registered person, etc.
7. CA: affirmed. Reduced amount to 903,038.39. 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.
ISSUE: WON respondent, despite incurring a net loss, may
still claim the 20% sales discount as a tax credit?
YES
HELD:
Tax Credit versus Tax Deduction
Tax credit generally refers to an amount that is subtracted
directly from ones total tax liability. It is an allowance against
tax itself or a deduction from what is owed by a taxpayer to
the government. (e.g. withheld taxes, payments of estimated
tax, and investment tax credits)
Tax Deduction is defined as a subtraction from income for tax
purposes, or amount that is allowed by law to reduce income
prior to the application of that tax rate to compute the
amount of tax which is due. (e.g. any of the allowable
deductions enumerated in Sec. 34 of the tax code).
In conclusion, tax credit reduces the tax due, including
whenever applicable the income tax that is determined
after applying the corresponding tax rates to taxable income.
It is used only after the tax has been computed. On the
other hand, tax deduction reduces the income that is
subject to tax in order to arrive at taxable income. It is used
before the tax has been computed.
1. Tax credit is used to reduce directly the tax that is due,
there ought to be a tax liability before the tax credit
can be applied. Without liability, any tax credit
application will be useless.
a. However, existence of 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.
b. RA 7432 has granted without conditions tax
credit benefit to all covered establishments.

2.

3.

4.

5.

6.

c. The tax credit may still be deducted from a

future tax liability. It need not move, but it
breathes.
Prior tax payments are not indispensable for tax credit.
Example of such:
a. VAT registered person engaging in transactions
is allowed a tax credit that includes a ratable
portion of any input tax not directly attributable
to either activity. The input tax is either due only
or given a value by mere comparison with the
VAT actually paid.
Thus the CA correctly held that the availment under RA
7432 did not require prior tax payments by private
establishments.
a. However, the court did not agree with its finding
that the carry-over of tax credits under the said
special law to succeeding taxable periods did
not necessitate the existence of a tax liability.
b. Again, tax liability is important in the availment
or use.
Therefore, if 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.
a. For the establishment to choose the
immediate availment of a tax credit will be
premature and impracticable.
b. NEVERTHELESS RA 7432 granted the tax
credit without conditions to all covered
establishment.
c. However, for the losing establishment to
apply such credit where no tax is due, will
be an improvident usance.
RA 7432 allows private establishments to claim as tax
credit the amount of discounts they grant. The IRR
provides the procedures for the availment. It is a clear
mandate of law.
What RA 7432 grants the senior citizen is a mere
discount privilege and not 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.
a. Sales discount is a deduction before while tax
credit is after.
b. In other words, tax credit benefit is not the same
as a sales discount. It should also not be treated
as a tax deduction.
7. 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.
8. In the present case, tax authorities have given the
term tax credit in Sections 2.i and 4 of RR 2-94 a
meaning utterly contrast to what RA 7432 provides.
a. Their interpretation has muddled up the intent
of Congress in granting a mere discount
privilege, not a sales discount.
9. For the tax authorities to compel respondent to deduct
the 20% discount from either its gross income or its
gross sales contravenes the law itself.
10.Sec 4.a of RA 7432 states that tax credit benefit is
merely permissive, not imperative. Respondent is
given 2 options: To claim or not to claim the tax credit.
11.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 the establishments can be deemed
as their just compensation for private property taken
by the State for public use.
a. Payment must be done (issuance of tax credit
certificate) within a reasonable time or it cannot
be considered as just compensation.
12.Taxation power can also be used as an implement for
the exercise of the power of eminent domain.
13.RA 7432 adopts measure whereby senior citizens are
assisted by the community as a while and to establish
a program beneficial to them.
a. Services available to them at affordable cost.
14.The true intent of RA 7432 is to treat the sales
discounts as a tax credit, rather than as a deduction
from gross income.

15.RA 7432 is a special law and should prevail over the

Tax Code.
DISPOSITIVE: Petition denied. Grant tax credit.

#40
BICOLANIA
DRUG
CORPORATION
COMMISIONER ON INTERNAL REVENUE - PELAYO

VS.

FACTS:

Petitioner Bicolandia Drug Corporation is a

domestic corporation principally engaged in the
retail of pharmaceutical products. Petitioner has a
drugstore located in Naga City under the name
and business style of "Mercury Drug."
Pursuant to the provisions of R.A. No. 7432, 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 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.
Subsequently petitioner alleged 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 toP52,215 and P334,750, respectively.
Petitioner filed a Petition for Review at the 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.
PETITIONER CONTENTION: 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.
CIR CONTENTION: That the aforesaid section
providing for a 20% sales discount to senior
citizens is a misnomer as it runs counter to the
solemn duty of the government to collect taxes.
The Commissioner likewise pointed out that the
provision in question employs the word "may,"
thereby implying that the availability of the
remedy of tax credit is not absolute and
mandatory and it does not confer an absolute
right on the taxpayer to avail of the tax credit
scheme if he so chooses. The Commissioner
further stated that in statutory construction, the
contemporaneous construction of a statute by
executive officers of the government whose duty
is to execute it is entitled to great respect and
should ordinarily control in its interpretation.
Thus, addressing the matter of the proper
construction of Section 4(a) of R.A. No. 7432
regarding the treatment of the 20% sales discount
given to senior citizens on their medicine
purchases, the CTA ruled on the issue of whether
or not the discount should be deductible from
gross sales of value-added tax or other
percentage tax purposes as prescribed under
Revenue Regulations No. 2-94 or as a tax credit
deductible from the tax due.
The CTA ordered the refund but on lesser amount.
(P45,574.63 and P135,906.48)
The CTA made a recomputation of the income tax
liability of the petitioner by allowing as tax credit the
cost of the discount only which is computed by

getting the percentage of cost of sales to total sales

and multiplying it with total discounts granted.
This ruling was affirmed by the CA.

ISSUES:
What is the amount allowed as tax credit? ENTIRE
AMOUNT
Can the discount be claimed by the taxpayer as a tax
refund? NO
HELD:
FIRST ISSUE: Reading of the provisions of Section 4(a) of
R.A. No. 7432, is as follows:
Sec. 4. Privilege 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 recreations centers
and
purchase
of
medicines
anywhere in the country: Provided,
That private establishments may
claim the cost as tax credit.
The term cost when applied to the discounts granted, is
susceptible to various interpretations. The BIR by virtue of RR
No. 2-94 interpreted it to mean the tax cost which is the very
reason why it was treated as a deduction from gross income.
The economic effect of this treatment is the same as allowing
35% (tax cost) of the discount as tax credit.
The CTA, on the other hand, interpreted it to be the cost of
the goods sold corresponding to the discounts to the extent
that they could have increased the sales if no discounts were
granted. Said in another way, were it not for the discounts
there could have been additional sales in the same amount

as the discounts, so the cost is the cost of goods sold

corresponding to these additional sales were it not for the
discount. The CTA, in determining the amount allowed as a
tax credit, came out with this formula, viz:
Total Cost of Goods Sold
granted = Cost of Discount
Total Sales

xTotal discounts

The SC is not convinced with either of the two interpretations

advances. The SC ruled that the entity granting the discount
is entitled to claim the entire amount of discount. The cost
referred to in Section 4(a) of R.A. No. 7432 refers to the
amount of the 20% discount extended to senior citizens in
their purchase of medicines. This amount shall be applied as
a tax credit, and may be deducted from the tax liability of the
entity concerned. If there is no current tax due, of the
establishment reports a net loss for the period, the credit
may be carried over to the succeeding taxable year. (CIR vs.
Central Drug Corp. April 15, 2005, 456 SCRA 414)
SECOND ISSUE: The SC ruled that the remedy of refund is
not available. The law expressly provides that the discount
given to senior citizens may be claimed as a tax credit, and
not a refund. Thus, where the words of a statute are clear,
plain and free from ambiguity, it must be given its literal
meaning and applied without attempted interpretation.
(Fianza vs. Peoples Law Enforcement Board, G.R. No.
109638, March 31, 1995, 243 SCRA 165). Accordingly, the SC
directed issuance of tax credit certificates to petitioner
instead of the refund prayed for. arellano law
This bring us to the issue of whether what is being asked to
be refunded is the discount or the overpaid income tax.
Which is to be applied first in paying the income tax liability
of the petitioner, the tax credit or the amount of money
tendered? It must be born in mind that there was an
overpayment of the tax because of the re-computation that
was made, treating this time the discount as tax credit
instead of treating of it as deduction from gross income. The
amount of the tax credit however, is not sufficient to offset
petitioners income tax hence, a substantial amount was also

paid for the years covered. Were it not for wrong treatment of
the discount, there could have been no overpayment made.
Will the overpayment not constitute an erroneously paid tax
thereby giving the taxpayer the right to file a claim for refund
under Section 204 and 229 of the NIRC?
ALSO: If the discount is not allowed to be refunded but it is
allowed to be refunded but it is allowed to be granted as a
tax credit certificate, as in this case, then there seems to be
a circumvention of the rule laid down in Central Drug (2005).
This is because a tax credit certificate cannot be used for
payment of other tax liabilities or at the option of the owner
can sale the same. Will his not be equivalent to the grant of
cold cash to the taxpayer and therefore the effect is the
same as that of a refund. What is not allowed directly should
not be allowed indirectly. Or it might be that the SC is of the
impression that tax credit certificate issued will only be used
for future income tax liability which seems to be the
inclination in the succeeding case.

#41 CARLOS SUPERDRUG CORP v. DSWD - REYES

TOPIC: Individual taxpayers exempt from tax Senior
Citizens
DOCTRINE: The Senior Citizens Act was enacted primarily to
maximize the contribution of senior citizens to nationbuilding, 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. The priority given to
senior citizens finds its basis in the Constitution 4 as set forth
in the law itself. [GUYZ HINDI ME SURE HUHUHU]
FACTS:
1. Petitioners are domestic corporations and proprietors
operating drugstores in the Philippines. They assail the
Constitutionality of Sec. 4[a] of Republic Act (R.A.) No.
9257or the Expanded Senior Citizens Act of 2003.
a. Sec. 4 [a] provides that senior citizens shall be
entitles to 20% discount, inter alia, to purchase
of medicines in all establishment for their
exclusive use.
2. Oct. 1, 2004, AO 171 or policies and guidelines to
implement RA 9257 was issued by DOH. It provided
20% discount in the purchase of UNBRANDED GENERIC
MEDICINES.
3. Nov. 12, 2004, DOH issues AO 177 amending AO 171,
providing that 20% discount shall not be limited to the
purchase of unbranded generic medicines, but also
extend to both PRESCRIPTION AND NON-PRESCRIPTION
MEDICINES, whether BRANDED or GENERIC.
4. Petitioners assail the constitutionality of Sec. 4[a] of RA
9257 on the following grounds:
a. Law is confiscatory because it infringes Art. III
Sec. of the Constitution which provides that
private property shall not be taken for public use
without just compensation;
i. Compelling
drugstore
owners
and
establishments to grant discount will
result in loss of profit and capital because:

4 Art. XV Sec. 4 Constitution.

1. Drugstores impose a mark-up of

only 5-10% on branded medicines;
and
2. The law failed to provide a scheme
whereby drugstores will be justly
compensated for the discount.
b. Violates equal protection clause;
c. 20% discount on medicines violates the
constitutional guarantee in Art. XIII Sex. 11 that
makes essential goods, health and other social
services available to all people at affordable
cost.
ISSUE: WON Sec. 4[a] of RA 9257 is Unconstitutional.
RATIO:
WHAT PETITIONERS ARE QUESTIONING IS THE
VALIDITY OF THE TAX DEDUCTION SCHEME AS A
REIMBURSEMENT
MECHANISM
FOR
THE
20%
DISCOUNT THAT THEY EXTEND TO SENIOR CITIZENS.
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. 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 word compensation, and to convey
the idea that the equivalent to be rendered for the
property to be taken shall be real, substantial, full and
ample.
A tax deduction does not offer full reimbursement of
the senior citizen discount. As such, it would not meet

the definition of just compensation.

ISSUE AS TO WHETHER THE STATE CAN IMPOSE UPON
PRIVATE
ESTABLISHMENTS
BURDEN
OF
PARTLY
SUBSIDIZING A GOVT PROGRAM

The Senior Citizens Act was enacted primarily to

maximize the contribution of senior citizens to nationbuilding, 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. The
priority given to senior citizens finds its basis in the
Constitution5 as set forth in the law itself.
o RA 7432 Sec. 1[f] - to recognize the important
role of the private sector in the improvement of
the welfare of the senior citizen and to actively
seek their partnership.
The law is a legitimate exercise of police power, which,
similar to the power of eminent domain, has general
welfare for its objects.
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.
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.

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.
DISPOSITIVE: Petition dismissed.

5 Art. XV Sec. 4 Constitution.