CIR VS.

CA AND CASTANEDA- RETIREMENT BENEFIT, TERMINAL LEAVE PAY IS NOT

FACTS:• Private respondent Efren P. Castaneda retired from the government service in 1982. Upon
retirement, he received, among other benefits, terminal leave pay from which petitioner Commissioner
of Internal Revenue withheld P12,557.13 allegedly representing income tax thereon.
• Castaneda filed a formal written claim with petitioner for a refund of the P12,557.13, contending that
the cash equivalent of his terminal leave is exempt from income tax. To comply with the two-year
prescriptive period within which claims for refund may be filed, Castaneda filed on 16 July 1984 with
the Court of Tax Appeals a Petition for Review, seeking the refund of income tax withheld from his
terminal leave pay.

• The Court of Tax Appeals decided in favor of Castaneda and ordered the CIR to refund Castaneda
the sum of P12,557.13 withheld as income tax. Petitioner appealed the above-mentioned Court of Tax
Appeals decision to this Court. In turn, we referred the case to the Court of Appeals for resolution. On
26 September 1990, the Court of Appeals dismissed the petition for review and affirmed the decision
of the Court of Tax Appeals. Hence, the present recourse by the Commissioner of Internal Revenue.
• The Solicitor General, acting on behalf of the Commissioner of Internal Revenue, contends that the
terminal leave pay is income derived from employer-employee relationship, citing in support of his
stand Section 28 of the NIRC.

ISSUE:Whether or not terminal leave pay received by a government official or employee on the
occasion of his compulsory retirement from the government service is subject to withholding (income)
tax.

HELD:• The Court has already ruled that the terminal leave pay received by a government official or
employee is not subject to withholding (income) tax. In the recent case of Jesus N. Borromeo vs. The
Hon. Civil Service Commission, et al., G.R. No. 96032, 31 July 1991, the Court explained the rationale
behind the employee's entitlement to an exemption from withholding (income) tax on his terminal
leave pay as follows: . . . commutation of leave credits, more commonly known as terminal leave, is
applied for by an officer or employee who retires, resigns or is separated from the service through no
fault of his own. (Manual on Leave Administration Course for Effectiveness published by the Civil
Service Commission, pages 16-17). In the exercise of sound personnel policy, the Government
encourages unused leaves to be accumulated. The Government recognizes that for most public
servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg
which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not
only at the same time but also for the same policy considerations governing retirement benefits.
• In fine, not being part of the gross salary or income of a government official or employee but a
retirement benefit, terminal leave pay is not subject to income tax.

RULING: Terminal Leave Pay received by a government official or employee is not subject to withholding
income tax. In the exercise of sound personnel policy, the Government encourages unused leaves to be
accumulated. The Government recognizes that retirement pay for public servants is less than generous, if not
meager or scrimpy. Terminal leave payments are given thus not only at the same time but also foor the same
policy considerations governing retirement benefits. Not being part of the gross salary or income of a
government official or employee but a retirement benefit, terminal leave pay is not subject to income tax.
 CIR vs. CA G.R. No. 95022 207 March 23, 1992 SCRA 487 Tax Exemption

FACTS:

Petitioner, seeks a reversal of the Decision of respondent CA, dated Aug. 27, 1990, in CA-G.R. SP
No. 20426, entitled “Commissioner of Internal Revenue vs. GCL Retirement Plan, represented by its
Trustee-Director and the Court of Tax Appeals,” which affirmed the Decision of the latter Court, dated
15 December 1986, in Case No. 3888, ordering a refund, in the sum of P11,302.19, to the GCL
Retirement Plan representing the withholding tax on income from money market placements and
purchase of treasury bills, imposed pursuant to Presidential Decree No. 1959.

There is no dispute with respect to the facts. Private Respondent, GCL Retirement Plan (GCL, for
brevity) is an employees’ trust maintained by the employer, GCL Inc., to provide retirement, pension,
disability and death benefits to its employees. The Plan as submitted was approved and qualified as
exempt from income tax by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act
No. 4917.

ISSUE:

Are school’s retained earnings tax-exempt?

RULING:

Yes. GCL Plan was qualified as exempt from income tax by the CIR in accordance with Rep. Act.
4917. The tax-exemption privilege of employees’ trusts, as distinguished from any other kind of
property held in trust, springs from Section 56(b) (now 53[b]) of the Tax Code, “The tax imposed by
this Title shall not apply to employee’s trust which forms part of a pension, stock bonus or profit-
sharing plan of an employer for the benefit of some or all of his employees . . .” And rightly so, by
virtue of the raison de’etre behind the creation of employees’ trusts. Employees’ trusts or benefit plans
normally provide economic assistance to employees upon the occurrence of certain contingencies,
particularly, old age retirement, death, sickness, or disability. It provides security against certain
hazards to which members of the Plan may be exposed. It is an independent and additional source of
protection for the working group. What is more, it is established for their exclusive benefit and for no
other purpose.

It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust.
Otherwise, taxation of those earnings would result in a diminution accumulated income and reduce
whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very
intendment of the law. There can be no denying either that the final withholding tax is collected
from income in respect of which employees’ trusts are declared exempt (Sec. 56 [b], now 53 [b], Tax
Code). The application of the withholdings system to interest on bank deposits or yield from deposit
substitutes is essentially to maximize and expedite the collection of income taxes by requiring its
payment at the source. If an employees’ trust like the GCL enjoys a tax-exempt status from income,
we see no logic in withholding a certain percentage of that income which it is not supposed to pay in
the first place
In RE Zialcita AM 90-6-015-SC, 18 October 1990
En Banc, Gutierrez Jr. (J): 13 concur, 1 on leave

Facts: Amounts were claimed by Atty. Bernardo F. Zialcity on the occasion of his retirement. On 23
August 1990, a resolution was issued by the Court En Banc stating that the terminal leave pay of Atty.
Zialcita received by virtue of his compulsory retirement can never be considered a part of his salary
subject to the payment of income tax but falls under the phrase “other benefits received by retiring
employees and workers,” within the meaning of Section 1 of PD 220 and is thus exempt from the
payment of income tax. That the money value of his accrued leave credits is not part of his salary is
buttessed by Section 3 of PD 985, which it makes it clear that the actual service is the period of time
for which pay has been received, excluding the period covered by terminal leave. The Commissioner
filed a motion for reconsideration.

Issue: Whether terminal leave pay is exempt from tax; as well as other amounts claimed herein.

Held: Applying Section 12 (c) of Commonwealth Act 186, as incorporated into RA 660, and Section
28 (c) of the former law, the amount received by Atty. Zialcita as a result of the converson of unused
leave credits, commonly known as terminal leave, is applied for by an officer or employee who retires,
resigns, or is separated from the service through no fault of his own. Since the terminal leave is
applied for after the severance of the employment, terminal pay is no longer compensation for
services rendered. It cannot be viewed as salary. Further, the terminal leave pay may also be
considered as a retirement gratuity, which is also another exclusion from gross income as provided for
in Section 28 (b), 7 (f) of the Tax Code. The 23 August Resolution (AM 90-6-015-SC), however,
specifically applies only to employees of the Judiciary who retire, resign or are separated through no
fault of their own. The resolution cannot be made to apply to otehr government employees, absent an
actual case or controversy, as that would be in principle an advisory opinion.
Intercontinental Broadcasting Corporation (IBC) vs. Amarilla,G.R. No. 162775, October
27, 2006

Facts:
Petitioner IBC employed the following persons at its Cebu station: Candido C. Quiñones, Jr., Corsini
R. Lagahit, as Studio Technician, Anatolio G.Otadoy, as Collector, and Noemi Amarilla, as Traffic
Clerk. On March 1, 1986,the government sequestered the station, including its properties, funds and
other assets, and took over its management and operations from its owner, Roberto Benedicto. On
November 3, 1990, the Presidential Commission on Good Government (PCGG) and Benedicto
executed a Compromise Agreement, where Benedicto transferred and assigned all his rights, shares
and interests in petitioner station to the government. The four (4) employees retired from the company
and received, on staggered basis, their retirement benefits under the 1993 Collective Bargaining
Agreement (CBA) between petitioner and the bargaining unit of its employees. In the meantime, a
P1,500.00 salary increase was given to all employees of the company, current and retired, effective
July 1994. However, when the four retirees demanded theirs, petitioner refused and instead informed
them via a letter that their differentials would be used to offset the tax due on their retirement benefits
in accordance with the National Internal Revenue Code (NIRC).The four retirees filed separate
complaints which averred that the retirement benefits are exempt from income tax under Article 32 of
the NIRC. For its part, petitioner averred that under Section 21 of the NIRC, the retirement benefits
received by employees from their employers constitute taxable income. While retirement benefits are
exempt from taxes under Section 28(b) of said Code, the law requires that such benefits received
should be in accord with a reasonable retirement plan duly registered with the Bureau of Internal
Revenue (BIR). Since its retirement plan in the 1993 CBA was not approved by the BIR, complainants
were liable for income tax on their retirement benefits. In reply, complainants averred that the claims
for the retirement salary differentials of Quiñones and Otadoy had not prescribed because the said
CBA was implemented only in 1997. They pointed out that they filed their claims with petitioner on
April 3, 1999. They maintained that they availed of the optional retirement because of petitioner’s
inducement that there would be no tax deductions. Petitioner countered that under Sections 72 and
73 of the NIRC, it is obliged to deduct and withhold taxes determined in accordance with the rules and
regulations to be prepared by the Secretary of Finance. The NLRC held that the benefits of the
retirement plan under the CBAs between petitioner and its union members were subject to tax as the
scheme was not approved by the BIR. However, it had also been the practice of petitioner to give
retiring employees their retirement pay without tax deductions and there was no justifiable reason for
the respondent to deviate from such practice.

Issues:

1. Whether the retirement benefits of respondents are part of their gross income.2. Whether petitioner
is estopped from reneging on its agreement with respondent to pay for the taxes on said retirement
benefits.

Ruling:

1. Yes. Under the NIRC, the retirement benefits of respondents are part of their gross income
subject to taxes. Thus, for the retirement benefits to be exempt from the withholding tax, the
taxpayer is burdened to prove the concurrence of the following elements: (1) a reasonable
private benefit plan is maintained by the employer; (2) the retiring official or employee has been
in the service of the same employer for at least 10 years; (3) the retiring official or employee is
not less than 50 years of age at the time of his retirement; and(4) the benefit had been availed of
only once. Respondents were qualified to retire optionally from their employment with petitioner.
However, there is no evidence on record that the 1993 CBA had been approved or was ever
presented to the BIR; hence, the retirement benefits of respondents are taxable. Under Section
80 of the NIRC, petitioner, as employer, was obliged to withhold the taxes on said benefits and
remit the same to the BIR. However, the Court agrees with respondents’ contention that
petitioner did not withhold the taxes due on their retirement benefits because it had obliged itself
to pay the taxes due thereon. This was done to induce respondents to agree to avail of the
optional retirement scheme.2. Yes. Petitioner is estopped from doing so. It must be stressed that
the parties are free to enter into any contract stipulation provided it is not illegal or contrary to
public morals. When such agreement freely and voluntarily entered into turns out to be
advantageous to a party, the courts cannot “rescue” the other party without violating the
constitutional right to contract. Courts are not authorized to extricate the parties from the
consequences of their acts. An agreement to pay the taxes on the retirement benefits as an
incentive to prospective retirees and for them to avail of the optional retirement scheme is not
contrary to law or to public morals. Petitioner had agreed to shoulder such taxes to entice them to
voluntarily retire early, on its belief that this would prove advantageous to it. Respondents agreed
and relied on the commitment of petitioner. For petitioner to renege on its contract with
respondents simply because its new management had found the same disadvantageous would
amount to a breach of contract. The well-entrenched rule is that estoppel may arise from a
making of a promise if it was intended that the promise should be relied upon and, in fact, was
relied upon, and if a refusal to sanction the perpetration of fraud would result to injustice. The
mere omission by the promisor to do whatever he promises to do is sufficient forbearance to give
rise to a promissory estoppel.
 CIR vs Mitsubishi, GR No L-54908, January 22, 1990

FACTS: Atlas Consolidated Mining and Dev Corp (Atlas) entered into a loan and sales contract with
Mitsubishi, a Japanese corp licenses to engage in business in the Phils., for purposes of the projected
expansion of the productive capacity of Atlas.

Mitsubishi agreed to extend a loan to Atlas for the installation of a new concentrator for copper
production and Atlas to sell to Mitsubishi all the copper concentrates produced for 15 years.
Mitsubishi applied for a loan with Export-Import Bank of Japan (Eximbank) for purpose of its obligation
under said contract. Pursuant to the contract between Atlas and Mitsubishi, interest payments were
made by Atlas to Mitsubishi for the years 1974-75. The corresponding 15% tax thereon in the amount
of P1,971,595.01 was withheld pursuant to sec. 24(b)(1) and sec. 53 (b)(2) of NIRC, as amended by
PD 131, and duly remitted to the government.

Private respondent filed a claim for the tax credit requesting the sum of P1,971,595.01 be applied
against their existing and future tax liabilities. It was later noted by respondent CTA that Mitsubishi
executed a waiver and disclaimer of its interest in the claim for tax credit in favor of Atlas.

Mitsubishi filed a petition for review with respondent court on the ground that Mitsubishi was a mere
agent of Eximbank, which is a financing institution owned, controlled and financed by the Japanese
Government. Such government status of Eximbank, if it may be so called, is the basis for private
respondents claim for exemption from paying the tax on the interest payment on the loan. It was
further claimed that the interest payments on the loan from the consortium of Japanese banks were
likewise exempt because loan supposedly came from or were fniancé by Eximbank. Relying on the
provision of sec. 29(b)(7)(A) NIRC.

CTA promulgated its decision ordering petitioner to grant a tax credit in favor of Atlas and the court
declared that all papers and documents pertaining to the loan obtained by Mitsubishi from Eximbank
shows that this was the same amount given to Atlas. It also observed that the money for the loan from
the consortium of private Japanese banks originated from Eximbank. From these, respondent court
concluded that the ultimate creditor of Atlas was Eximbank. Mitsubishi was acting as a mere
“arranger or conduit through which the loan flowed from the creditor Eximbank to the debtor Atlas.

ISSUE: 1) WON the interest income from the loan extended to Atlas by Mitsubishi is excludible from
gross income taxation pursuant to sec. 29(b)(7)(A), NIRC and therefore, exempt from withholding tax.

2) WON Mitsubishi is a mere conduit of Eximbank which will then be considered as the
creditor whose investment in the Phils. On loans are exempt from taxes.

HELD:
1) NO
The signatories on the loans and sales contract were Mitsubishi and Atlas, nowhere in the contract
can it be inferred that Mitsubishi acted for and behalf of Eximbank of Japan nor of any entity, private
or public, for that matter. When Mitsubishi obtained the loan of USD 20M from Eximbank of Japan
said amount ceased to be the property of the bank and become property of Mitsubishi.

Mitsubishi and not Eximbank is the sole creditor of Atlas, the former being the owner of the USD 20M
upon completion of its loan contract with Eximbank of Japan. The interest income of the loan paid by
Atlas to Mitsubishi is therefore entirely different from the interest income paid by Mitsubishi to
Eximbank of Japan. What was the subject of the 15% withholding tax is not the interest income paid
by Mitsubishi to Eximbank, but the interest income earned by Mitsubishi from the loan to Atlas.

2) NO

When Mitsubishi secured the loan, it was in its own independent capacity as a private entity and not
as a conduit of the consortium of Japanese banks or the Eximbank of Japan. While loans were
secured by Mitsubishi primarily “as a loan to and in consideration for importing copper concentrates
from Atlas, the fact remains that it was a loan by Eximbank of Japan to Mitsubishi and not to Atlas.