COMMISSIONER OF INTERNAL

CARPENTRY
G.R. No. 71122 March 25, 1988

REVENUE

vs.

ARNOLDUS
SHOP

Facts: Arnoldus Carpentry Shop, Inc. is engaged in the

business of preparing, processing, buying, selling, exporting,
importing, manufacturing, trading and dealing in cabinet shop
products, wood and metal home and office furniture, cabinets,
doors, windows, etc. These furniture, cabinets and other
woodwork were sold locally and exported abroad. For this
business venture, private respondent kept samples or models
of its woodwork on display from where its customers may
refer to when placing their orders.
In March 1979, CIR conducted a investigation of the business
tax liabilities of Arnoldus. It found out that it is a contractor
and not a manufacturer. It was assessed of 3% contractors
tax. Accdg to CIR, Arnoldus manufactures woodworks only
upon previous order from supposed manufacturers and only in
accordance with the latters own design, model number, color,
etc. (The products are contracts for a piece of work.)
Arnoldus opposed contending that it is a manufacturer, hence
entitled to tax exemption on its gross export sales under
Section 202 (e) of the National Internal Revenue Code.
Issue: 1) WON Arnoldus is a manufacturer? YES
a. Corrollarily, WON it is a contract of sale or contract for piece
of work? Contract of SALE.
Held:1)Arnoldus is a manufacturer as defined in the Tax
Code and not a contractor under Section 205(e) of the Tax
Code.
2) Accdg to CIR: the true test of whether or not the contract is
a piece of work (and thus classifying private respondent as a
contractor) or a contract of sale (which would classify private
respondent as a manufacturer) is the mere existence of the
product at the time of the perfection of the contract such that
if the thing already exists, the contract is of sale, if not, it is
work.
TRUE TEST whether or not it is contract of sale or for a piece
of
work:
What determines whether the contract is one of work or of
sale is whether the thing has been manufactured specially for
the customer and upon his special order. Thus, if the thing is
specially done at the order of another, this is a contract for a
piece of work. If, on the other hand, the thing is manufactured
or procured for the general market in the ordinary course of
ones business, it is a contract of sale. The distinction between
a contract of sale and one for work, labor and materials is
tested by the inquiry whether the thing transferred is one not
in existence and which never would have existed but for the
order of the party desiring to acquire it, or a thing which
would have existed and has been the subject of sale to some
other persons even if the order had not been given. The mere
fact that he did not have on hand a particular piece or pieces
of furniture ordered does not make him a contractor only.
A contract for the delivery at a certain price of an article
Which the vendor in the ordinary course of his business
manufactures or procures for the general market, whether

the same is on hand at the time or not, is a contract of sale,

but if the goods are to be manufactured specially for the
customer and upon his special order, and not for the general
market, it is a contract for a piece of work.
Arnoldus had a ready stock of its shop products for sale to its
foreign and local buyers. As a matter of fact, the purchase
orders from its foreign buyers showed that they ordered by
referring to the models designed by petitioner. Even
purchases by local buyers for television cabinets were by
orders for existing models. Hence, it is a manufacturer.
Furthermore, it is a contract of sale.
These products were for sale to the general public and not for
special orders. Hence, being a manufacturer, Arnoldus is
entitled to tax exemption under Sec 202 (d) and Sec 167 (d) &
(e) of the Tax Code.
CIR v Castaneda (G.R. No. 96016)
FACTS: Efren Castaneda retired from govt service as Revenue
Attache in the Philippine Embassy, London, England. Upon
retirement, he received benefits such as the terminal leave
pay. The Commissioner of Internal Revenue withheld P12,557
allegedly representing that it was tax income.
Castaneda filed for a refund, contending that the cash
equivalent of his terminal leave is exempt from income tax.
The Solicitor General contends that the terminal leave is
based from an employer-employee relationship and that as
part of the services rendered by the employee, the terminal
leave pay is part of the gross income of the recipient.
CTA -> ruled in favor of Castaneda and ordered the refund.
CA -> affirmed decision of CTA. Hence, this petition for review
on certiorari.
ISSUE: Whether or not terminal leave pay (on occasion of his
compulsory retirement) is subject to income tax.
HELD:NO. As explained in Borromeo v CSC, the rationale of
the court in holding that terminal leave pays are subject to
income tax is that:
. . 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. 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.

A terminal leave pay is a retirement benefit which is NOT

subject to income tax.

applicable to members of the judiciary which were

appointed AFTER the effectivity of such law.

Judge David Nitafan vs Commissioner of Internal Revenue

Note: This case abandoned the ruling in Perfecto vs
Judge David Nitafan and several other judges of the

Meer and in Endencia vs David.

Manila Regional Trial Court seek to prohibit the

Commissioner of Internal Revenue (CIR) from making
any deduction of withholding taxes from their salaries
or compensation for such would tantamount to a
diminution of their salary, which is unconstitutional.
Earlier however, or on June 7, 1987, the Court en
banc had already reaffirmed the directive of the Chief
Justice which directs the continued withholding of taxes
of the justices and the judges of the judiciary but the

China Banking Corporation vs. CA

[G.R. No. 125508. July 19, 2000]
CHINA BANKING CORPORATION, petitioner, vs.
COURT
OF
APPEALS,
COMMISSIONER
OF
INTERNAL REVENUE and COURT OF TAX APPEALS,
respondents.

SC decided to rule on this case nonetheless to settle

the issue once and for all.
ISSUE: Whether or not the members of the judiciary
are exempt from the payment of income tax.
HELD: No. The clear intent of the framers of the
Constitution, based on their deliberations, was NOT to
exempt justices and judges from general taxation.
Members of the judiciary, just like members of the
other branches of the government, are subject to
income

taxation. What

is

provided

for

by

the

constitution is that salaries of judges may not be

decreased during their continuance in office. They have
a fix salary which may not be subject to the whims and
caprices of congress. But the salaries of the judges
shall be subject to the general income tax as well as
other members of the judiciary.
But may the salaries of the members of the judiciary
be increased?
Yes. The Congress may pass a law increasing the salary
of the members of the judiciary and such increase will

Petitioner China Banking Corp made an equity

investment in the First CBC Capital, a HongKong
subsidiary engaged in financing and investment with
deposit-taking function.
A regular examination by Bangko Sentral on petitioner
financial book and investment portfolio shows that First
CBC Capital has become insolvent. With approval of
Bangko Sentral, petitioner wrote off as being worthless
in its investment in First CBC in its 1987 Income Tax
Return and treated it as a bad debt or as an ordinary
loss deductible from its gross income. Respondent CIR
disallowed the deduction and assessed petitioner for
income deficiency, inclusive of surcharge, interest and
compromise penalty.
Issue: WON petitioner is allowed to claim for the
deductions?
Held:NO.The disallowance of the deduction was made
on the ground that the investment should not be
classified as being worthless and that, although the
HongKong Banking Commissioner had revoked the
license of First CBC Capital as a deposit-taking
company it can still exercise its financing investments.
Also, it should be classifies as capital loss and not as a
bad debts expense there being no indebtedness to
speak petitioner and its subsidiary.

immediately take effect thus the incumbent members

of the judiciary (at the time of the passing of the law
increasing their salary) shall benefit immediately.
Congress can also pass a law decreasing the salary of
the members of the judiciary but such will only be

Baas Jr. v. Court of Appeals [G.R. No. 102967.

FACTS Petitioner entered into a deed of sale purportedly

on installment. He discounted the promissory note
covering the future installments for purposes of taxation.

ISSUE
Whether or not the promissory note should be declared
cash transaction for purposes of taxation.
RULING
YES. A negotiable instrument is deemed a substitute for
money and for value. According to Sec. 25 of NIL: value
is any consideration sufficient to support a simple
contract. An antecedent or pre-existing debt constitutes

value; and is deemed such whether the instrument is

payable on demand or at a future time. Although the
proceed of a discounted promissory note is not
considered part of the initial payment, it is still taxable
income for the year it was converted into cash.