Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-19865

July 31, 1965

MARIA CARLA PIROVANO, etc., et al., petitioners-appellants,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.
Angel S. Gamboa for petitioners-appellants.
Office of the Solicitor General for respondent-appellee.
REYES, J.B.L., J.:
This case is a sequel to the case of Pirovano vs. De la Rama Steamship Co., 96 Phil. 335.
Briefly, the facts of the aforestated case may be stated as follows:
Enrico Pirovano was the father of the herein petitioners-appellants. Sometime in the early part of 1941, De la Rama
Steamship Co. insured the life of said Enrico Pirovano, who was then its President and General Manager until the
time of his death, with various Philippine and American insurance companies for a total sum of one million pesos,
designating itself as the beneficiary of the policies, obtained by it. Due to the Japanese occupation of the Philippines
during the second World War, the Company was unable to pay the premiums on the policies issued by its Philippine
insurers and these policies lapsed, while the policies issued by its American insurers were kept effective and
subsisting, the New York office of the Company having continued paying its premiums from year to year.
During the Japanese occupation , or more particularly in the latter part of 1944, said Enrico Pirovano died.
After the liberation of the Philippines from the Japanese forces, the Board of Directors of De la Rama Steamship Co.
adopted a resolution dated July 10, 1946 granting and setting aside, out of the proceeds expected to be collected on
the insurance policies taken on the life of said Enrico Pirovano, the sum of P400,000.00 for equal division among
the four (4) minor children of the deceased, said sum of money to be convertible into 4,000 shares of stock of the
Company, at par, or 1,000 shares for each child. Shortly thereafter, the Company received the total sum of
P643,000.00 as proceeds of the said life insurance policies obtained from American insurers.
Upon receipt of the last stated sum of money, the Board of Directors of the Company modified, on January 6, 1947,
the above-mentioned resolution by renouncing all its rights title, and interest to the said amount of P643,000.00 in
favor of the minor children of the deceased, subject to the express condition that said amount should be retained by
the Company in the nature of a loan to it, drawing interest at the rate of five per centum (5%) per annum, and
payable to the Pirovano children after the Company shall have first settled in full the balance of its present
remaining bonded indebtedness in the sum of approximately P5,000,000.00. This latter resolution was carried out in
a Memorandum Agreement on January 10, 1947 and June 17, 1947., respectively, executed by the Company and
Mrs. Estefania R. Pirovano, the latter acting in her capacity as guardian of her children (petitioners-appellants
herein) find pursuant to an express authority granted her by the court.

On June 24, 1947, the Board of Directors of the Company further modified the last mentioned resolution providing
therein that the Company shall pay the proceeds of said life insurance policies to the heirs of the said Enrico
Pirovano after the Company shall have settled in full the balance of its present remaining bonded indebtedness, but
the annual interests accruing on the principal shall be paid to the heirs of the said Enrico Pirovano, or their duly
appointed representative, whenever the Company is in a position to meet said obligation.
On February 26, 1948, Mrs. Estefania R. Pirovano, in behalf of her children, executed a public document formally
accepting the donation; and, on the same date, the Company through its Board of Directors, took official notice of
this formal acceptance.
On September 13, 1949, the stockholders of the Company formally ratified the various resolutions hereinabove
mentioned with certain clarifying modifications that the payment of the donation shall not be effected until such
time as the Company shall have first duly liquidated its present bonded indebtedness in the amount of P3,260,855.77
with the National Development Company, or fully redeemed the preferred shares of stock in the amount which shall
be issued to the National Development Company in lieu thereof; and that any and all taxes, legal fees, and expenses
in any way connected with the above transaction shall be chargeable and deducted from the proceeds of the life
insurance policies mentioned in the resolutions of the Board of Directors.
On March 8, 1951, however, the majority stockholders of the Company voted to revoke the resolution approving the
donation in favor of the Pirovano children.
As a consequence of this revocation and refusal of the Company to pay the balance of the donation amounting to
P564,980.90 despite demands therefor, the herein petitioners-appellants represented by their natural guardian, Mrs.
Estefania R. Pirovano, brought an action for the recovery of said amount, plus interest and damages against De la
Rama Steamship Co., in the Court of First Instance of Rizal, which case ultimately culminated to an appeal to this
Court. On December 29, 1954, this court rendered its decision in the appealed case (96 Phil. 335) holding that the
donation was valid and remunerative in nature, the dispositive part of which reads:
Wherefore, the decision appealed from should be modified as follows: (a) that the donation in favor of the
children of the late Enrico Pirovano of the proceeds of the insurance policies taken on his life is valid and
binding on the defendant corporation; (b) that said donation, which amounts to a total of P583,813.59,
including interest, as it appears in the books of the corporation as of August 31, 1951, plus interest thereon
at the rate of 5 per cent per annum from the filing of the complaint, should be paid to the plaintiffs after the
defendant corporation shall have fully redeemed the preferred shares issued to the National Development
Company under the terms and conditions stared in the resolutions of the Board of Directors of January 6,
1947 and June 24, 1947, as amended by the resolution of the stockholders adopted on September 13, 1949;
and (c) defendant shall pay to plaintiffs an additional amount equivalent to 10 per cent of said amount of
P583,813.59 as damages by way of attorney's fees, and to pay the costs of action. (Pirovano et al. vs. De la
Rama Steamship Co., 96 Phil. 367-368)
The above decision became final and executory. In compliance therewith, De la Rama Steamship Co. made, on April
6, 1955, a partial payment on the amount of the judgment and paid the balance thereof on May 12, 1955.
On March 6, 1955, respondent Commissioner of Internal Revenue assessed the amount of P60,869.67 as donees' gift
tax, inclusive of surcharges, interests and other penalties, against each of the petitioners-appellants, or for the total
sum of P243,478.68; and, on April 23, 1955, a donor's gift tax in the total amount of P34,371.76 was also assessed
against De la Rama Steamship Co., which the latter paid.

Petitioners-appellants herein contested respondent Commissioner's assessment and imposition of the donees' gift
taxes and donor's gift tax and also made a claim for refund of the donor's gift tax so collected. Respondent
Commissioner overruled petitioners' claims; hence, the latter presented two (2) petitions for review against
respondent's rulings before the Court of Tax Appeals, said petitions having been docketed as CTA Cases Nos. 347
and 375. CTA Case No. 347 relates to the petition disputing the legality of the assessment of donees' gift taxes and
donor's gift tax while CTA Case No. 375 refers to the claim for refund of the donor's gift tax already paid.
After the filing of respondent's usual answers to the petitions, the two cases, being interrelated to each other, were
tried jointly and terminated.
On January 31, 1962, the Court of Tax Appeals rendered its decision in the two cases, the dispositive part of which
reads:
In resume, we are of the opinion, that (1) the donor's gift tax in the sum of P34,371.76 was erroneously
assessed and collected, hence, petitioners are entitled to the refund thereof; (2) the donees' gift taxes were
correctly assessed; (3) the imposition of the surcharge of 25% is not proper; (4) the surcharge of 5% is
legally due; and (5) the interest of 1% per month on the deficiency donees' gift taxes is due from petitioners
from March 8, 1955 until the taxes are paid.
IN LINE WITH THE FOREGOING OPINION, petitioners are hereby ordered to pay the donees' gift taxes
as assessed by respondent, plus 5% surcharge and interest at the rate of 1% per month from March 8, 1955
to the date of payment of said donees' gift taxes. Respondent is ordered to apply the sum of P34,371.76
which is refundable to petitioners, against the amount due from petitioners. With costs against petitioners in
Case No. 347.
Petitioners-appellants herein filed a motion to reconsider the above decision, which the lower court denied. Hence,
this appeal before us.
In the instant appeal, petitioners-appellants herein question only that portion of the decision of the lower court
ordering the payment of donees' gift taxes as assessed by respondent as well as the imposition of surcharge and
interest on the amount of donees' gift taxes.
In their brief and memorandum, they dispute the factual finding of the lower court that De la Rama Steamship
Company's renunciation of its rights, title, and interest over the proceeds of said life insurance policies in favor of
the Pirovano children "was motivated solely and exclusively by its sense of gratitude, an act of pure liberality, and
not to pay additional compensation for services inadequately paid for." Petitioners now contend that the lower
court's finding was erroneous in seemingly considering the disputed grant as a simple donation, since our previous
decision (96 Phil. 335) had already declared that the transfer to the Pirovano children was a remuneratory donation.
Petitioners further contend that the same was made not for an insufficient or inadequate consideration but rather it a
was made for a full and adequate compensation for the valuable services rendered by the late Enrico Pirovano to the
De la Rama Steamship Co.; hence, the donation does not constitute a taxable gift under the provisions of Section
108 of the National Internal Revenue Code.
The argument for petitioners-appellants fails to take into account the fact that neither in Spanish nor in AngloAmerican law was it considered that past services, rendered without relying on a coetaneous promise, express or
implied, that such services would be paid for in the future, constituted cause or consideration that would make a
conveyance of property anything else but a gift or donation. This conclusion flows from the text of Article 619 of the
Code of 1889 (identical with Article 726 of the present Civil Code of the Philippines):

When a person gives to another a thing ... on account of the latter's merits or of the services rendered by
him to the donor, provided they do not constitute a demandable debt, ..., there is also a donation. ... .
There is nothing on record to show that when the late Enrico Pirovano rendered services as President and General
Manager of the De la Rama Steamship Co. he was not fully compensated for such services, or that, because they
were "largely responsible for the rapid and very successful development of the activities of the company" (Res. of
July 10, 1946). Pirovano expected or was promised further compensation over and in addition to his regular
emoluments as President and General Manager. The fact that his services contributed in a large measure to the
success of the company did not give rise to a recoverable debt, and the conveyances made by the company to his
heirs remain a gift or donation. This is emphasized by the directors' Resolution of January 6, 1947, that "out of
gratitude" the company decided to renounce in favor of Pirovano's heirs the proceeds of the life insurance policies in
question. The true consideration for the donation was, therefore, the company's gratitude for his services, and not the
services themselves.
That the tax court regarded the conveyance as a simple donation, instead of a remuneratory one as it was declared to
be in our previous decision, is but an innocuous error; whether remuneratory or simple, the conveyance remained a
gift, taxable under Chapter 2, Title III of the Internal Revenue Code.
But then appellants contend, the entire property or right donated should not be considered as a gift for taxation
purposes; only that portion of the value of the property or right transferred, if any, which is in excess of the value of
the services rendered should be considered as a taxable gift. They cite in support Section 111 of the Tax Code which
provides that
Where property is transferred for less, than an adequate and full consideration in money or money's worth,
then the amount by which the value of the property exceeded the value of the consideration shall, for the
purpose of the tax imposed by this Chapter, be deemed a gift, ... .
The flaw in this argument lies in the fact that, as copied from American law, the term consideration used in this
section refers to the technical "consideration" defined by the American Law Institute (Restatement of Contracts) as
"anything that is bargained for by the promisor and given by the promisee in exchange for the promise" (Also,
Corbin on Contracts, Vol. I, p. 359). But, as we have seen, Pirovano's successful activities as officer of the De la
Rama Steamship Co. cannot be deemed such consideration for the gift to his heirs, since the services were rendered
long before the Company ceded the value of the life policies to said heirs; cession and services were not the result of
one bargain or of a mutual exchange of promises.
And the Anglo-American law treats a subsequent promise to pay for past services (like one to pay for improvements
already made without prior request from the promisor) to be a nudum pactum (Roscorla vs. Thomas, 3 Q.B. 234;
Peters vs. Poro, 25 ALR 615; Carson vs. Clark, 25 Am. Dec. 79; Boston vs. Dodge, 12 Am. Dec. 206), i.e., one that
is unenforceable in view of the common law rule that consideration must consist in a legal benefit to the promisee or
some legal detriment to the promisor.
What is more, the actual consideration for the cession of the policies, as previously shown, was the Company's
gratitude to Pirovano; so that under section 111 of the Code there is no consideration the value of which can be
deducted from that of the property transferred as a gift. Like "love and affection," gratitude has no economic value
and is not "consideration" in the sense that the word is used in this section of the Tax Code.
As stated by Chief Justice Griffith of the Supreme Court of Mississippi in his well-known book, "Outlines of the
Law" (p. 204)

Love and affection are not considerations of value they are not estimable in terms of value. Nor are sentiments of
gratitude for gratuitous part favors or kindnesses; nor are obligations which are merely moral. It has been well said
that if a moral obligation were alone sufficient it would remove the necessity for any consideration at all, since the
fact of making a promise impose, the moral obligation to perform it."
It is of course perfectly possible that a donation or gift should at the same time impose a burden or condition on the
donee involving some economic liability for him. A, for example, may donate a parcel of land to B on condition that
the latter assume a mortgage existing on the donated land. In this case the donee may rightfully insist that the gift tax
be computed only on the value of the land less the value of the mortgage. This, in fact, is contemplated by Article
619 of the Civil Code of 1889 (Art. 726 of the Tax Code) when it provides that there is also a donation "when the
gift imposes upon the donee a burden which is less than the value of the thing given." Section 111 of the Tax Code
has in view situations of this kind, since it also prescribes that "the amount by which the value of the property
exceeded the value of the consideration" shall be deemed a gift for the purpose of the tax. .
Petitioners finally contend that, even assuming that the donation in question is subject to donees' gift taxes, the
imposition of the surcharge of 5% and interest of 1% per month from March 8, 1955 was not justified because the
proceeds of the life insurance policies were actually received on April 6, 1955 and May 12, 1955 only and in
accordance with Section 115(c) of the Tax Code; the filing of the returns of such tax became due on March 1, 1956
and the tax became payable on May 15, 1956, as provided for in Section 116(a) of the same Code. In other words,
petitioners maintain that the assessment and demand for donees' gift taxes was prematurely made and of no legal
effect; hence, they should not be held liable for such surcharge and interest.
It is well to note, and it is not disputed, that petitioners-donees have failed to file any gift tax return and that they
also failed to pay the amount of the assessment made against them by respondent in 1955. This situation is covered
by Section 119(b) (1) and (c) and Section 120 of the Tax Code:
(b) Deficiency.
(1) Payment not extended. Where a deficiency, or any interest assessed in connection therewith, or any
addition to the taxes provided for in section one hundred twenty is not paid in full within thirty days from
the date of the notice and demand from the Commissioner, there shall be collected as a part of the taxes,
interest upon the unpaid amount at the rate of one per centum a month from the date of such notice and
demand until it is paid. (section 119)
(c) Surcharge. If any amount of the taxes included in the notice and demand from the Commissioner of
Internal Revenue is not paid in full within thirty days after such notice and demand, there shall be collected
in addition to the interest prescribed above as a part of the taxes a surcharge of five per centum of the
unpaid amount. (sec. 119)
The failure to file a return was found by the lower court to be due to reasonable cause and not to willful neglect. On
this score, the elimination by the lower court of the 25% surcharge is ad valorem penalty which respondent
Commissioner had imposed pursuant to Section 120 of the Tax Code was proper, since said Section 120 vests in the
Commissioner of Internal Revenue or in the tax court power and authority to impose or not to impose such penalty
depending upon whether or not reasonable cause has been shown in the non-filing of such return.
On the other hand, unlike said Section 120, Section 119, paragraphs (b) (1) and (c) of the Tax Code, does not confer
on the Commissioner of Internal Revenue or on the courts any power and discretion not to impose such interest and
surcharge. It is likewise provided for by law that an appeal to the Court of Tax Appeals from a decision of the

Commissioner of Internal Revenue shall not suspend the payment or collection of the tax liability of the taxpayer
unless a motion to that effect shall have been presented to the court and granted by it on the ground that such
collection will jeopardize the interest of the taxpayer (Sec. 11, Republic Act No. 1125; Rule 12, Rules of the Court
of Tax Appeals). It should further be noted that
It has been the uniform holding of this Court that no suit for enjoining the collection of a tax, disputed or
undisputed, can be brought, the remedy being to pay the tax first, formerly under protest and now without
need of protect, file the claim with the Collector, and if he denies it, bring an action for recovery against
him. (David v. Ramos, et al., 90 Phil. 351)
Section 306 of the National Internal Revenue Code ... lays down the procedure to be followed in those
cases wherein a taxpayer entertains some doubt about the correctness of a tax sought to be collected. Said
section provides that the tax, should first be paid and the taxpayer should sue for its recovery afterwards.
The purpose of the law obviously is to prevent delay in the collection of taxes, upon which the Government
depends for its existence. To allow a taxpayer to first secure a ruling as regards the validity of the tax before
paying it would be to defeat this purpose. (National Dental Supply Co. vs. Meer, 90 Phil. 265)
Petitioners did not file in the lower court any motion for the suspension of payment or collection of the amount of
assessment made against them.
On the basis of the above-stated provisions of law and applicable authorities, it is evident that the imposition of 1%
interest monthly and 5% surcharge is justified and legal. As succinctly stated by the court below, said imposition is
"mandatory and may not be waived by the Commissioner of Internal Revenue or by the courts" (Resolution on
petitioners' motion for reconsideration, Annex XIV, petition). Hence, said imposition of interest and surcharge by the
lower court should be upheld.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed. Costs against petitioners Pirovano.
Bengzon, C.J., Bautista Angelo, Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.
Concepcion, J., took no part.
Barrera, J., is on leave.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 148083

July 21, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BICOLANDIA DRUG CORPORATION (Formerly known as ELMAS DRUG CO.), respondent.
DECISION
VELASCO, JR., J.:

In cases of conflict between the law and the rules and regulations implementing the law, the law shall always
prevail. Should Revenue Regulations deviate from the law they seek to implement, they will be struck down.
The Facts
In 1992, Republic Act No. 7432, otherwise known as "An Act to Maximize the Contribution of Senior Citizens to
Nation Building, Grant Benefits and Special Privileges and For Other Purposes," granted senior citizens several
privileges, one of which was obtaining a 20 percent discount from all establishments relative to the use of
transportation services, hotels and similar lodging establishments, restaurants and recreation centers and purchase of
medicines anywhere in the country.1 The law also provided that the private establishments giving the discount to
senior citizens may claim the cost as tax credit.2 In compliance with the law, the Bureau of Internal Revenue issued
Revenue Regulations No. 2-94, which defined "tax credit" as follows:
Tax Credit refers to the amount representing the 20% discount granted to a qualified senior citizen by all
establishments relative to their utilization of transportation services, hotels and similar lodging
establishments, restaurants, halls, circuses, carnivals and other similar places of culture, leisure and
amusement, which discount shall be deducted by the said establishments from their gross income for
income tax purposes and from their gross sales for value-added tax or other percentage tax purposes.3
In 1995, respondent Bicolandia Drug Corporation, a corporation engaged in the business of retailing pharmaceutical
products under the business style of "Mercury Drug," granted the 20 percent sales discount to qualified senior
citizens purchasing their medicines in compliance with R.A. No. 7432.4 Respondent treated this discount as a
deduction from its gross income in compliance with Revenue Regulations No. 2-94, which implemented R.A. No.
7432.5 On April 15, 1996, respondent filed its 1995 Corporate Annual Income Tax Return declaring a net loss
position with nil income tax liability.6
On December 27, 1996, respondent filed a claim for tax refund or credit in the amount of PhP 259,659.00 with the
Appellate Division of the Bureau of Internal Revenuebecause its net losses for the year 1995 prevented it from
benefiting from the treatment of sales discounts as a deduction from gross sales during the said taxable year.7 It
alleged that the petitioner Commissioner of Internal Revenue erred in treating the 20 percent sales discount given to
senior citizens as a deduction from its gross income for income tax purposes or other percentage tax purposes rather
than as a tax credit.8
On April 6, 1998, respondent appealed to the Court of Tax Appeals in order to toll the running of two (2)-year
prescriptive period to file a claim for refund pursuant to Section 230 of the Tax Code then. 9 Respondent argued that
since Section 4 of R.A. No. 7432 provided that discounts granted to senior citizens may be claimed as tax credit,
Section 2(i) of Revenue Regulations No. 2-94, which referred to the tax credit as the amount representing the 20
percent discount that "shall be deducted by the said establishments from their gross income for income tax purposes
and from their gross sales for value-added tax or other percentage tax purposes,"10 is illegal, void and without effect
for being inconsistent with the statute it implements.
Petitioner maintained that Revenue Regulations No. 2-94 is valid since the law tasked the Department of Finance,
among other government offices, with the issuance of the necessary rules and regulations to carry out the objectives
of the law.11
Ruling of the Court of Tax Appeals

The Court of Tax Appeals declared that the provisions of R.A. No. 7432 would prevail over Section 2(i) of Revenue
Regulations No. 2-94, whose definition of "tax credit" deviated from the intendment of the law; and as a result,
partially granted the respondent's claim for a refund. After examining the evidence on record, the Court of Tax
Appeals reduced the claimed 20 percent sales discount, thus reducing the refund to be given. It ruled that
"Respondent is hereby ORDERED to REFUND in favor of Petitioner the amount of P236,321.52, representing
overpaid income tax for the year 1995."12
Ruling of the Court of Appeals
On appeal, the Court of Appeals modified the decision of the Court of Tax Appeals as the law provided for a tax
credit, not a tax refund. The fallo of the Decision states:
WHEREFORE, premises considered, the present appeal is hereby GRANTED and the Decision of the
Court of Tax Appeals in C.T.A. Case No. 5599 is hereby MODIFIED in the sense that the award of tax
refund is ANNULLED and SET ASIDE. Instead, the petitioner is hereby ORDERED to issue a tax credit
certificate in favor of the respondent in the amount of P 236,321.52.
No pronouncement as to costs.13
The Issue
Petitioner now argues that the Court of Appeals erred in holding that the 20 percent sales discount granted to
qualified senior citizens by the respondent pursuant to R.A. No. 7432 may be claimed as a tax credit, instead of a
deduction from gross income or gross sales.14
The Court's Ruling
The petition is not meritorious.
Redefining "Tax Credit" as "Tax Deduction"
The problem stems from the issuance of Revenue Regulations No. 2-94, which was supposed to implement R.A. No.
7432, and the radical departure it made when it defined the "tax credit" that would be granted to establishments that
give 20 percent discount to senior citizens. Under Revenue Regulations No. 2-94, the tax credit is "the amount
representing the 20 percent discount granted to a qualified senior citizen by all establishments relative to their
utilization of transportation services, hotels and similar lodging establishments, restaurants, drugstores, recreation
centers, theaters, cinema houses, concert halls, circuses, carnivals and other similar places of culture, leisure and
amusement, which discount shall be deducted by the said establishments from their gross income for income tax
purposes and from their gross sales for value-added tax or other percentage tax purposes."15 It equated "tax credit"
with "tax deduction," contrary to the definition in Black's Law Dictionary, which defined tax credit as:
An amount subtracted from an individual's or entity's tax liability to arrive at the total tax liability. A tax
credit reduces the taxpayer's liability x x x, compared to a deduction which reduces taxable income upon
which the tax liability is calculated. A credit differs from deduction to the extent that the former is
subtracted from the tax while the latter is subtracted from income before the tax is computed. 16
The interpretation of an administrative government agency, which is tasked to implement the statute, is accorded
great respect and ordinarily controls the construction of the courts.17 Be that as it may, the definition laid down in the

questioned Revenue Regulations can still be subjected to scrutiny. Courts will not hesitate to set aside an executive
interpretation when it is clearly erroneous. There is no need for interpretation when there is no ambiguity in the rule,
or when the language or words used are clear and plain or readily understandable to an ordinary reader.18 The
definition of the term "tax credit" is plain and clear, and the attempt of Revenue Regulations No. 2-94 to define it
differently is the root of the conflict.
Tax Credit is not Tax Refund
Petitioner argues that the tax credit is in the nature of a tax refund and should be treated as a return for tax payments
erroneously or excessively assessed against a taxpayer, in line with Section 204(c) of Republic Act No. 8424, or the
National Internal Revenue Code of 1997. Petitioner claims that there should first be payment of the tax before the
tax credit can be claimed. However, in the National Internal Revenue Code, we see at least one instance where this
is not the case. Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate
or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that
such input tax has not been applied against output tax.19 It speaks of a tax credit for tax due, so payment of the tax
has not yet been made in that particular example.
The Court of Appeals expressly recognized the differences between a "tax credit" and a "tax refund," and stated that
the same are not synonymous with each other, which is why it modified the ruling of the Court of Tax Appeals.
Revenue Regulations No. 2-94 vs. R.A. No. 7432 and
R.A. No. 7432 vs. the National Internal Revenue Code
Petitioner contends that since R.A. No. 7432 used the word "may," the availability of the tax credit to private
establishments is only permissive and not absolute or mandatory. From that starting point, petitioner further argues
that the definition of the term "tax credit" in Revenue Regulations No. 2-94 was validly issued under the authority
granted by the law to the Department of Finance to formulate the needed guidelines. It further explained that
Revenue Regulations No. 2-94 can be harmonized with R.A No. 7432, such that the definition of the term "tax
credit" in Revenue Regulations No. 2-94 is controlling. It claims that to do otherwise would result in Section 4(a) of
R.A. No. 7432 impliedly repealing Section 204 (c) of the National Internal Revenue Code.
These arguments must also fail.
Revenue Regulations No. 2-94 is still subordinate to R.A. No. 7432, and in cases of conflict, the implementing rule
will not prevail over the law it seeks to implement. While seemingly conflicting laws must be harmonized as far as
practicable, in this particular case, the conflict cannot be resolved in the manner the petitioner wishes. There is a
great divide separating the idea of "tax credit" and "tax deduction," as seen in the definition in Black's Law
Dictionary.
The claimed absurdity of Section 4(a) of R.A. No. 7432 impliedly repealing Section 204(c) of the National Internal
Revenue Code could only come about if it is accepted that a tax credit is akin to a tax refund wherein payment of
taxes must be made in order for it to be claimed. But as shown in Section 112(a) of the National Internal Revenue
Code, it is not always necessary for payment to be made for a tax credit to be available.
Looking into R.A. No. 7432

Finally, petitioner argues that should private establishments, which count respondent in their number, be allowed to
claim tax credits for discounts given to senior citizens, they would be earning and not just be reimbursed for the
discounts given.
It cannot be denied that R.A. No. 7432 has a laudable goal. Moreover, it cannot be argued that it was the intent of
lawmakers for private establishments to be the primary beneficiaries of the law. However, while the purpose of the
law to benefit senior citizens is praiseworthy, the concerns of the affected private establishments were also
considered by the lawmakers. As in other cases wherein private property is taken by the State for public use, there
must be just compensation. In this particular case, it took the form of the tax credit granted to private establishments,
purposely chosen by the lawmakers. In the similar case of Commissioner of Internal Revenue v. Central Luzon Drug
Corporation,20 scrutinizing the deliberations of the Bicameral Conference Committee Meeting on Social Justice on
February 5, 1992 which finalized R.A. No. 7432, the discussions of the lawmakers clearly showed the intent that the
cost of the 20 percent discount may be claimed by the private establishments as a tax credit. An excerpt from the
deliberations is as follows:
SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount, provided that, the
private hospitals can claim the expense as a tax credit.
REP. AQUINO. Yah could be allowed as deductions in the preparation of (inaudible) income.
SEN. ANGARA. I-tax credit na lang natin para walang cash-out?
REP. AQUINO. Oo, tax credit. Tama. Okay. Hospitals ba o lahat ng establishments na covered.
THE CHAIRMAN. Sa kuwan lang yon, as private hospitals lang.
REP. AQUINO. Ano ba yung establishments na covered?
SEN. ANGARA. Restaurant, lodging houses, recreation centers.
REP. AQUINO. All establishments covered siguro?
SEN. ANGARA. From all establishments. Alisin na natin `yung kuwan kung ganon. Can we go back to
Section 4 ha?
REP. AQUINO. Oho.
SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20% discount from all
establishments et cetera, et cetera, provided that said establishments may claim the cost as a tax credit.
Ganon ba `yon?
REP. AQUINO. Yah.
SEN. ANGARA. Dahil kung government, they don't need to claim it.
THE CHAIRMAN. Tax credit.
SEN. ANGARA. As a tax credit [rather] than a kuwan deduction, Okay.21

It is clear that the lawmakers intended the grant of a tax credit to complying private establishments like the
respondent.
If the private establishments appear to benefit more from the tax credit than originally intended, it is not for
petitioner to say that they shouldn't. The tax credit may actually have provided greater incentive for the private
establishments to comply with R.A. No. 7432, or quicker relief from the cut into profits of these businesses.
Revenue Regulations No. 2-94 Null and Void
From the above discussion, it must be concluded that Revenue Regulations No. 2-94 is null and void for failing to
conform to the law it sought to implement. In case of discrepancy between the basic law and a rule or regulation
issued to implement said law, the basic law prevails because said rule or regulation cannot go beyond the terms and
provisions of the basic law.22
Revenue Regulations No. 2-94 being null and void, it must be ruled then that under R.A. No. 7432, which was
effective at the time, respondent is entitled to its claim of a tax credit, and the ruling of the Court of Appeals must be
affirmed.
But even as this particular case is decided in this manner, it must be noted that the concerns of the petitioner
regarding tax credits granted to private establishments giving discounts to senior citizens have been addressed. R.A.
No. 7432 has been amended by Republic Act No. 9257, the "Expanded Senior Citizens Act of 2003." In this, the
term "tax credit" is no longer used. The 20 percent discount granted by hotels and similar lodging establishments,
restaurants and recreation centers, and in the purchase of medicines in all establishments for the exclusive use and
enjoyment of senior citizens is treated in the following manner:
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the
net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is granted. Provided, further, that
the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their
gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of
the National Internal Revenue Code, as amended.23
This time around, there is no conflict between the law and the implementing Revenue Regulations. Under Revenue
Regulations No. 4-2006, "(o)nly the actual amount of the discount granted or a sales discount not exceeding 20% of
the gross selling price can be deducted from the gross income, net of value added tax, if applicable, for income tax
purposes, and from gross sales or gross receipts of the business enterprise concerned, for VAT or other percentage
tax purposes."24 Under the new law, there is no tax credit to speak of, only deductions.
Petitioner can find some vindication in the amendment made to R.A. No. 7432 by R.A. No. 9257, which may be
more in consonance with the principles of taxation, but as it was R.A. No. 7432 in force at the time this case arose,
this law controls the result in this particular case, for which reason the petition must fail.
This case should remind all heads of executive agencies which are given the power to promulgate rules and
regulations, that they assume the roles of lawmakers. It is well-settled that a regulation should not conflict with the
law it implements. Thus, those drafting the regulations should study well the laws their rules will implement, even to
the extent of reviewing the minutes of the deliberations of Congress about its intent when it drafted the law. They
may also consult the Secretary of Justice or the Solicitor General for their opinions on the drafted rules.
Administrative rules, regulations and orders have the efficacy and force of law so long as they do not contravene any

statute or the Constitution.25 It is then the duty of the agencies to ensure that their rules do not deviate from or amend
acts of Congress, for their regulations are always subordinate to law.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision of the Court of Appeals is AFFIRMED.
There is no pronouncement as to costs.
SO ORDERED.
Quisumbing, Chairman, Carpio-Morales, Tinga, J.J., concur.
Carpio, J., on official leave.