M.E.

Holding Corp v CA Tax 1 – Income tax on Individuals

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G.R. No. 160193 March 3, 2008 VELASCO, JR., J Mond
Petitioners: Respondents:
M.E. HOLDING CORPORATION THE HON. COURT OF APPEALS
COURT OF TAX APPEALS
THE COMMISSIONER OF INTERNAL REVENUE
Recit Ready Summary

M.E. Holding Corporation filed its 1995 Corporate Annual Income Tax Return under protest, arguing that
the 20% sales discount it granted to qualified senior citizens should be treated as tax credit. There was a
conflict in the interpretation of the law, since RA 7432 provides that the tax discounts should be treated as
tax credit, but Revenue Regulation No. (RR) 2-94 provides that they should be treated as deductions.

Due to inaction of the BIR, M.E. filed an appeal before the CTA, which ruled in favor of M.E. but reduced
the claim for PhP 603,923.46 to PhP 122,195.74. CTA disallowed part of the claims due to failure to
present the corresponding cash slips. CTA also based its computation on the acquisition cost of the
product sold and not the actual discount given.

M.E. filed for MR, arguing that it was the independent auditor’s fault that the cash slips were not
presented; but the MR was denied. CA also denied ME’s petition. Thus the present case.

The issues are:

1. W/N the discounts should be treated as tax credit - Yes
2. W/N the cash slips should be the only evidence for the discount - No
3. W/N M.E. should be allowed to submit the disallowed cash slips - No
4. W/N tax credit should be based on actual discount – Yes

SC ruled that a law necessarily prevails over an administrative issuance. RA 7432 should prevail over the
implementing RR 2-94. Thus the discounts should be treated as tax credit, and not tax deductions.

With respect to cash slips as evidence, it ruled that the best evidence under the circumstance must be
adduced to prove the allegations. Only when the best evidence cannot be submitted may secondary
evidence be considered. Cash slips are the best evidence for proving the discounts. In this case, it was
not impossible for M.E. to submit the cash slips, and yet it still failed to do so. While it may be true that
the authenticated special record books yield the same data found in the cash slips, they cannot plausibly
be considered by the courts a quo and made to corroborate pieces of evidence that have, in the first
place, been disallowed. Claims for tax refund/credit are in the nature of claims for exemption. Accordingly,
the proofs presented entitling a taxpayer to an exemption are strictissimi scrutinized.

SC also ruled that tax credit should be based on actual discount, not on the acquisition cost. SC cited
Bicolandia Drug Corporation v CIR, where it interpreted the term "cost" as referring to the amount of the
20% discount extended by a private establishment to senior citizens in their purchase of medicines.
There, SC said that it is the Government that should fully shoulder the cost of the sales discount granted
to senior citizens. Accordingly, ME’s claim for refund was increased by SC to PhP 151,201.71 from PhP
122,195.74.

The SC however clarified that RA 9257 or The Expanded Senior Citizens Act of 2003 amended RA 7432.
The later law already provided that the discounts given to senior citizens should be treated as deductions.

Facts plus Procedural History

1. On April 15, 1996, M.E. Holding Corporation (M.E.) filed its 1995 Corporate Annual Income
Tax Return, claiming the 20% sales discount it granted to qualified senior citizens (the
nature of ME’s business was not mentioned in the case).
2. M.E. treated the discount as deductions from its gross income purportedly in accordance

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 with Revenue Regulation No. (RR) 2-94, Sec. 2 which provides:
Tax Credit – the amount representing the 20% discount granted to a qualified
senior citizen by all establishments xxx xxx xxx shall be deducted by the said
establishments from their gross income for income tax purposes.
3. The deductions M.E. claimed amounted to PhP 603,424. However, it filed the return under
protest, arguing that the discount to senior citizens should be treated as tax credit under
Sec. 4(a) of RA 7432, which provides:
SECTION 4. Privileges for the Senior Citizens - Xxx xxx xx private
establishments may claim the cost as tax credit
4. M.E. sent BIR a letter-claim dated December 6, 1996, stating that it overpaid its income tax
owing to the BIR's erroneous interpretation.
5. Due to the inaction of the BIR, and to toll the running of the two-year prescriptive period in
filing a claim for refund, M.E. filed an appeal before the Court of Tax Appeals (CTA),
reiterating its position.
6. CTA ruled in favor of M.E but reduced the claim for PhP 603,923.46 to PhP 122,195.74 due
to failure to support the claims with corresponding cash slips. CTA also based the
discounts on the acquisition costs of the products rather than the actual discount given.
7. M.E. filed a Motion for Reconsideration, attributing its failure to submit and offer the cash
slips to the inadvertence of its independent auditor who failed to transmit the documents to
M.E.'s counsel (the auditors admitted the inadvertence in an affidavit). It argued that the
authenticated special record books yield the same data found in the cash slips. It also
argued that the tax credit should be based on the actual discount and not on the acquisition
cost of the medicines.
8. The CTA denied M.E.'s motion for reconsideration.
9. M.E. went to CA which dismissed the petition.
Point of Contention

M.E. argues that:

a. RA 7432 (discounts as tax credit) should govern, not RR 2-94 (discounts as deductions)
b. There are other competent pieces of evidence available to prove the discounts; merely relying on
cash slips as basis is erroneous
c. M.E. should be given the opportunity to submit the disallowed cash slips
d. The tax credit should be based on actual discount given, not on the acquisition cost of the product
Issues Ruling
5. W/N the discounts should be treated as tax credit 1. Yes
6. W/N the cash slips should be the only evidence for the discount 2. No
7. W/N M.E. should be allowed to submit the disallowed cash slips 3. No
8. W/N tax credit should be based on actual discount 4. Yes

Rationale
1. The discounts should be treated as tax credit

The 20% sales discount to senior citizens may be claimed by an establishment owner as tax
credit. RA 7432, the applicable law, is unequivocal on this. The implementing RR 2-94 that
considers such discount as mere deductions to the taxpayer's gross income or gross sales clearly
clashes with the clear language of RA 7432, the law sought to be implemented. A law necessarily
prevails over an administrative issuance.

2. The cash slips are not the only evidence for the discount, but M.E. is still precluded to
present other evidence

The rule is that the best evidence under the circumstance must be adduced to prove the
allegations in a complaint, petition, or protest. Only when the best evidence cannot be submitted
may secondary evidence be considered. But, in the instant case, the disallowed cash slips, the
best evidence at that time, were not part of M.E.'s offer of evidence. While it may be true that the
authenticated special record books yield the same data found in the cash slips, they cannot

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 plausibly be considered by the courts a quo and made to corroborate pieces of evidence that
have, in the first place, been disallowed.

Claims for tax refund/credit, as in the instant case, are in the nature of claims for exemption.
Accordingly, the law relied upon is not only construed in strictissimi juris against the taxpayer, but
also the proofs presented entitling a taxpayer to an exemption are strictissimi scrutinized.

3. M.E. should not be allowed to submit the disallowed cash slips; there is no grave abuse on
the part of CA

The CA cannot be guilty of gravely abusing its discretion when it refused to consider, in lieu of the
unsubmitted additional cash slips, the special record books which are only secondary evidence.
The cash slips were the best evidence. Also, the CA noted that the belatedly-offered cash slips
were presented only after the CTA had rendered its decision. All these factors argue against the
notion that the CA had, in sustaining the CTA, whimsically and capriciously exercised its
discretion.

4. The tax credit should be based on actual discount

In Bicolandia Drug Corporation v CIR, SC interpreted the term "cost" as referring to the amount of
the 20% discount extended by a private establishment to senior citizens in their purchase of
medicines. There, SC said that it is the Government that should fully shoulder the cost of the
sales discount granted to senior citizens. Accordingly, M.E. is entitled to a tax credit equivalent to
the actual 20% sales discount it granted to qualified senior citizens.

With the disallowance of PhP 241,348.89 for being unsupported, and the net amount of PhP
362,574.57 for the actual 20% sales discount granted to qualified senior citizens properly allowed
by the CTA and fully appreciated as tax credit, the amount due as tax credit in favor of M.E. is
PhP 151,201.71 (CTA only granted PhP 122,195.74)

5. Other notes: the current treatment for discounts given to senior citizens is tax deduction

On February 26, 2004, RA 9257, or The Expanded Senior Citizens Act of 2003, amending RA
7432, was signed into law, ushering in, upon its effectivity on March 21, 2004, a new tax
treatment for sales discount purchases of qualified senior citizens of medicines. Sec. 4(a) of RA
9257 provides:
SEC. 4. Privileges for the Senior Citizens – xxx xxx xxx The establishment may claim the
discounts granted xxx xxx xx as tax deduction based on the net cost of the goods sold or
services rendered.

Disposition

Petition partly granted. ME’s claim for refund is increased to PhP 151,201.71 from PhP 122,195.74.