Case Summary (G.R. No. 220250)
Case Background and Facts
Efren P. Castaneda, a government official serving as Revenue Attache at the Philippine Embassy in London, retired from government service on December 10, 1982, under Section 12(c) of Commonwealth Act 186, as amended. Upon retirement, Castaneda received terminal leave pay among his benefits. The Commissioner of Internal Revenue withheld P12,557.13 from this terminal leave pay, claiming it as income tax.
Believing the withholding to be improper, Castaneda filed a claim for refund with the Commissioner, insisting that the terminal leave pay's cash equivalent was exempt from income tax. To protect his right within the two-year prescriptive period for refund claims, he filed a petition for review with the Court of Tax Appeals (CTA) on July 16, 1984, seeking refund of the withheld amount.
Decisions in Lower Courts
The Court of Tax Appeals ruled in favor of Castaneda, ordering the CIR to refund the P12,557.13 withheld from his terminal leave pay. The CIR appealed this ruling, and the Supreme Court referred the petition to the Court of Appeals (CA) for resolution. On September 26, 1990, the Court of Appeals dismissed the CIR’s petition for review and affirmed the CTA's decision, maintaining that the terminal leave pay was exempt from withholding income tax.
Issue Presented
The fundamental legal issue was whether terminal leave pay received by a government official or employee upon compulsory retirement constitutes taxable income subject to withholding tax under the National Internal Revenue Code.
Petitioner's Argument
The Commissioner of Internal Revenue, represented by the Solicitor General, argued that terminal leave pay is income derived from the employer-employee relationship and, as such, constitutes gross income under Section 28 of the National Internal Revenue Code. The petitioner contended that it is part of the compensation for services rendered and therefore should not be exempt. The CIR distinguished terminal leave pay from salary, emphasizing that terminal leave pay represents the commutation of leave credits rather than salary received for services at the time of payment.
Supreme Court’s Analysis and Rationale
The Supreme Court affirmed the rulings of the lower tribunals, relying heavily on the precedent established in Jesus N. Borromeo vs. The Hon. Civil Service Commission, G.R. No. 96032, July 31, 1991. The Court stressed that terminal leave pay, which is the cash equivalent of accumulated leave credits given upon retirement, resignation, or separation without fault, serves as a retirement benefit rather than current income or compensation.
The Court underscored the government's policy to encourage the accumulation of unused leave and to provide employees a modest financial safeguard upon retirement, given that r
...continue readingCase Syllabus (G.R. No. 220250)
Background of the Case
- The central issue concerns whether terminal leave pay received by a government official or employee upon compulsory retirement from government service is subject to withholding (income) tax.
- Respondent Efren P. Castaneda retired from government service on December 10, 1982, as Revenue Attache at the Philippine Embassy in London, under Section 12(c) of Commonwealth Act 186, as amended.
- Upon retirement, Castaneda received terminal leave pay among other benefits.
- The Commissioner of Internal Revenue withheld income tax amounting to P12,557.13 from his terminal leave pay.
Procedural History
- Castaneda filed a formal written claim with the Commissioner of Internal Revenue for a refund of the withheld amount, asserting that his terminal leave pay was exempt from income tax.
- To meet the two-year prescriptive period for claims, Castaneda petitioned the Court of Tax Appeals (CTA) on July 16, 1984, seeking the refund of the withheld income tax.
- The CTA ruled in favor of Castaneda, ordering the Commissioner to refund the P12,557.13 withheld.
- The Commissioner appealed the CTA decision to the Supreme Court (G.R. No. 80320), which referred the case to the Court of Appeals (CA-G.R. SP No. 20482).
- On September 26, 1990, the Court of Appeals dismissed the petition, affirming the CTA ruling in favor of Castaneda.
- The present petition for review on certiorari was then filed by the Commissioner to challenge the CA decision.
Arguments of the Parties
The Commissioner of Internal Revenue, represented by the Solicitor General, argued that:
- Terminal leave pay constitutes income derived from an employer-employee relationship.
- Under Section 28 of the National Internal Revenue Code, as compensation for services rendered, terminal leave pay forms part of the gross income of the employee.
- Terminal leave cannot be considered salary, nor is it a commutation or conversion of salary, but rather a commutation of leave credits accumulated for old age or separation from service.
Respondent Castaneda maintained:
- Terminal leave pay is not part of gross incom