OF INTERNAL REVENUE,
G. R. No. 96016
October 17, 1991
OF APPEALS and EFREN P. CASTANEDA,
E S O L U T I O N
The issue to be
resolved in this Petition for
whether or not terminal leave pay received by a
government official or employee on the occasion of his compulsory
from the government service is subject to withholding [income] tax.
We resolve the
issue in the negative.cralaw
respondent Efren P. Castaneda retired
from the government service as Revenue Attache in the Philippine
in London, England, on 10 December 1982 under the provisions of Section
12 [c] of Commonwealth Act 186, as amended. Upon retirement, he
among other benefits, terminal leave pay from which petitioner
of Internal Revenue withheld P12,557.13 allegedly representing income
Castaneda filed a
formal written claim with petitioner
for a refund of the P12,557.13, contending that the cash equivalent of
his terminal leave is exempt from income tax. To comply with the
prescriptive period within which claims for refund may be filed,
filed on 16 July 1984 with the Court of Tax Appeals a Petition for
seeking the refund of income tax withheld from his terminal leave pay.cralaw
The Court of Tax
Appeals found for private respondent
Castaneda and ordered the Commissioner of Internal Revenue to refund
the sum of P12,557.13 withheld as income tax. [Annex "C", petition].cralaw
appealed the abovementioned Court of
Tax Appeals decision to this Court, which was docketed as G. R. No.
In turn, we referred the case to the Court of Appeals for resolution.
case was docketed in the Court of Appeals as CA-G. R. SP No. 20482.cralaw
On 26 September
1990, the Court of Appeals dismissed
the petition for review and affirmed the decision of the Court of Tax
Hence, the present recourse by the Commissioner of Internal Revenue.cralaw
General, acting on behalf of the
Commissioner of Internal Revenue, contends that the terminal leave pay
is income derived from employer-employee relationship, citing in
of his stand Section 28 of the National Internal Revenue Code; that as
part of the compensation for services rendered, terminal leave pay is
part of gross income of the recipient. Thus:
It [terminal leave pay] cannot be viewed
for purposes which would reduce it. There can thus be no
of salary" when a government retiree applies for terminal leave because
he is not receiving it as salary. What he applies for is a "commutation
of leave credits." It is an accumulation of credits intended for old
or separation from service.
The Court has
already ruled that the terminal leave
pay received by a government official or employee is not subject to
[income] tax. In the recent case of Jesus N. Borromeo vs. The Hon.
Service Commission, et al., G. R. No. 96032, 31 July 1991, the Court
the rationale behind the employee's entitlement to an exemption from
[income] tax on his terminal leave pay as follows:
Commutation of leave credits, more
as terminal leave, is applied for by an officer or employee who
resigns or is separated from the service through no fault of his own.
on Leave Administration Course for Effectiveness published by the Civil
Service Commission, pages 16-17]. In the exercise of sound personnel
the Government encourages unused leaves to be accumulated. The
recognizes that for most public servants, retirement pay is always less
than generous if not meager and scrimpy. A modest nest egg which the
citizen may look forward to is thus avoided. Terminal leave payments
given not only at the same time but also for the same policy
governing retirement benefits.
In fine, not
being part of the gross salary or income
of a government official or employee but a retirement benefit, terminal
leave pay is not subject to income tax.
petition for review is hereby
Regalado, JJ., concur.
Melencio-Herrera, J., is on leave.