Republic of the PHILIPPINI6 Court of Tax Appeals Quezon C Ity Marcos F. Catalan vs. The Commissioner of Internal Revenue

DECISION

CTA CASE NO. 4345 for the refund of the withheld amount. However . respondent failed to act on the said claim before the expiration of the two-year prescriptive period, hence, petitioner instituted this Fetition for Review on March 2, 1989, Fetitioner advance the following reasons in support of his claim for refunds Qe The commutation (ar payment of the money value) of unused leave credits is part of the retirement benefits of an employee retiring under the provisions of R.A. No. 1616, as amended.

b. Fresidential Decree No. 220 epecifically provides that "provisions of any exisiting law to the contrary notwithstanding. social security benefits, retirement ar. ies. and. other similar benefits received ob t 9... employe . whether received from Fhilippine or foreiaqn qovernment agencies and other institutions, private or public. shall be exempt from. the payment of income tax." (Underscoring supplied.)

Cc. Since commutation of unused leave credits is granted under the GSIS Law (C.A. No. 1986, as amended by R.A. No. L616) and therefore is also a SIS retirement benefit, which is not included in gross income and is exempt from taxation, under Sectian 28(b)(7) of the National Internal Revenue Code.

Petitioner further cited previous decisions by this Court such as Efren oF. Castaneda vs, The Commissioner of Internal Revenue, CTA Case No.

3809, February 4, 1987 and Florencio —. Santos vs.

O40

- 3 - No.

4004~ November 18~ 1987~ wherein the court ruled on the entitlement of retirees to the refund of the taxes withheld from the accumulated vacation and sick leave credits. Respondent on his part admits the basic facts nar-rated in the Petition for Review. However~ he raises questions that the Castaneda case is sti 11 pending resolution by the Supreme Court while the Santos case has been resolved only in a minute resolution by the Supreme Court. He reiterated his stand that the money value of vacation and sick leaves are part of compensation for services rendered and therefore subject to income tax. This case was withdrawn by the petitioner in view of the adverse opinion by the Supreme Court in the case of Justice Oscar Victoriano~ G.R.

831765~ August 10~ .1989 holdi.ng his terminal leave subject to .income t;aN but with permission of this Court was reinstated in view of the subsequent favorable opinion of the Supreme Cou rt in the administrative case of Mr. Bernard o F. Z.ialcita~ A.M.

90-6-0 1 5-SC~

August 23~ 1990.

The issue presented f or resolution of this Court is whether Ot- not the money value of the 54.1 DECISION CTA CASE NO. 4345 accumulated vacation and sick leave credits are subject to income tax.

This Court has consistently ruled in the case cited of Efren P. Castaneda vs. The Commissioner of Commissioner..of Internal Revenue, that the money value of the terminal leave credits of retiring government employees are exempted from income tax. We cited in support of this stand Commonwealth Act No. 186, as amended by R.A. 1616, Fresidential Decree No. 220 and Section 29(b)(7) of the National Internal Revenue Code (now Section 28(b)(7)). This Court was affirmed by the Supreme Court in both instances in the cases of Commissioner of Internal Revenue vs. The Court of Appeals and Efren perenettteqyeeannsrreniesenarcsntere sn snssnepensaneemnrenanrevenpeniesrestranenestytete eeatenenrssumenrracraawanrrrstaresfentreanqatsterteersansershabatagsonenresneeeyeeesenres Tax Appeals and Florenci dated July 4, 1988. The affirmation by the Supreme Court of the Castaneda case was in confirmation of an earlier decision by the Court of Appeals in C.A.-G.R. SF No. 20482 dated September 26, 1990 likewise sustaining the position taken by the Tax Court on the merits of the claim for refund of Efren Castaneda.

94?

DECISION CTA CASE NO. 4345 - 5 - The Supreme Cour-t in another cas e invo 1 v ing administrative s ettlement of the claim of Bern a rdo F.

Zialcit a ~ Deputy Clerk of Court~ or-dered the Fiscal Management & Budget Office the refund of the ta >: withheld ·from his terminal leave. The court holds that the terminal leave pay can never be cons idered part of his salary subject to the payme nt of inc ome ta:·: but fa 11 s under the phrase "other similar benefits received by r-etiring employees and worker-s"~ within the meaning of Section 1 o ·f F'. D.

220 and therefor-e e:·:empt from income ta:·:.

It is in this case that the SL1pr-eme Court diff e rentiated the case of Zialcita wi~h the case of Jus tice Vic tor iano. While the c ase of Zialcita involves payment of terminal leave by r·eas on of compulsory r-etirement~ in the case of Victor-iano~ the terminal leave pay he received when he a pplied for optional r-etirement had been conver-ted into vacation and sick leave 1-'Ji th commutation of salary which forms part of his regular- salary subject to income The conversion and commutation were done because before the effectivity of his optional r-etirement on December 1982~ he \-'liaS appointed Ac t.ing Commi s sioner of the Land Registration Commission on DECISION CTA CASE NO . 4 345 - 6 - November 19~ 1982.

In still another recent administrative case of C:..QJTJIJ.l ..

:i.. ~.?.A.Q.D. .!'?.r.~ .. .... !?. .. .t. ....... !::\ .. 1 .. ~ .. ~ G. R. No. 96032 ~ 31 July 1991 ~ the Court e:-:plained the rationale behind the employee's entitlement to an e)·:emption from withholding (income ) tax on his terminal leave pay~ as ·follc::>ws:

")oD: commutation of leave ct-edits~ more common l y 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 t he Civil Service Com m ission~ pages 16-17) . In the e>:erc:;ise of sound personnel pol icy~ 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 .

Termi.na l leave payments at-e given not only at the same time but also for t he same pol icy considerations governing retirement benefits." In fine~ not being part of t he gross salary or income of a govern ment officia l or employee but a retirement benefit~ terminal leave pay is not subject to income tax .

WHEREFORE, in view of thi s clear and consistent pronouncement by the Supreme Court , respondent is hereby ordered to refund to petitioner the amount of P28,271 . 53 representing DECISION CTA CASE NO. 4345 - 7 - err oneous ly withheld tax from the money value of his terminal leave .

WE CONCUR:

~-W Presiding Judge CDNe~c ~DAQUIN ;ssociate Judge ~ . ..s;; (;2 .. ~ ERNESTO D. ACOSTA Associate Judge CERTIFICATION I hereby certify that this decision was reached after due consultation a mong the mem bers of the Court of Tax Appeals in accordance with Section 13~ Article VIII of the Constitution. ~~ ALEX Z. REYES Presiding Judge Court of Tax Appeals