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CASE DIGEST 17 – COMMISSIONER OF INTERNAL REVENUE VS BICOLANDIA DRUG CORP

FACTS:

1. Republic Act No. 7432, otherwise known as "Senior Citizens Act" gave 20% discount to senior
citizens’ medicine purchases, among others. The law allowed the private establishments giving
the discount to claim the discount as a tax credit.

2. The Revenue Regulations No. 2-94 issued by the BIR to implement said Act defined “tax credit” as
a deduction from gross income, meaning, a tax deduction. Bicolandia Drug declared a net loss
position with nil income tax liability. It filed a claim for tax refund or credit with the BIR Appellate
Division because its net losses prevented it from benefiting from the treatment of sales discounts
as a deduction from gross sales during the said taxable year.

3. Bicolandia appealed to the CTA alleging that the definition of tax credit in the RR 2-94 is erroneous.
CTA ordered BIR to give Bicolandia Drug a refund. On appeal, CA modified CTA’s decision and
ordered BIR to issue a tax credit certificate to Bicolandia. Hence this appeal.

ISSUE: Whether or not the 20% 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.

HELD: YES. The Petition is hereby DENIED.

1. The Court struck down RR 2-94 issued by BIR in the implementation of RA 7432 insofar as RR 2-
94 redefined the term “tax credit”. 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, 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.”

2. 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. Be that
as it may, the definition laid down in the question regulation can still be subjected to scrutiny.

3. 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. The definition
of the term “tax credit” is plain and clear, and the attempt of RR 2-94 to define it differently is the
root of the conflict.