CTA Case No. 5194 (Decision)

.-~' REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ORLANDO M. ESCAREAL, Petitioner, - versus - C.T.~. CASE NO. 5194 COMMISSIONER OF INTERNAL Promulgated: ., REVENUE, SEP 021996 Respondent. X - - - - - - - - - - - - - - - - - - - -�~ ----X DECISION This is a petition for review seeking the reversal of the January 19, 1995 decision of the Assistant Commissioner of the Bureau of Internal Revenue {BIR), denying petitioner's application for refund of withheld income ~axes plus interest on his backwages, bonuses and cash value of his accrued vacation leave covering the period 1988 to 1991 , a I I received in 1993. The facts, as narrated in the petition, are as fo I Iows: On September 16, 1977, petitioner was hired by Phi I ippine Refining Inc., <now Uni lever Phi I ippines Inc.), PRC for brevity, as a Pollution Control Manager, and subsequently designate, d as Safety Manager. On June 15, 1988, petitioner received a notice that the position \, of "Safety and Pollution Control Manager wi II be declared 969

DECISION C.T.A. CASE NO. 5194 - 2- redundant effective at the close of work hours on 15th July 1988." Petitioner cha I Ienged the validity of his ' t termination from employment before the PRC, the Labor Arbiter, the National Labor Relations Commission and ultimately the Supreme Court which rendered a ru''li ..ng, .-;.., dated September 2, 1992, stating that petitioner was i I legally terminated from his employment and is therefore entitled to the award of backwages from August 16, 1988 to July 21, 1991, inclusive of allowances and monetary equivalent of other benefits due him for that period, as wei I as his retirement pay and other benefits provided under PRC's compulsory retirement scheme. PRC was therefore obI i gated to pay the petitioner the sum of ONE MILLION TEN THOUSAND THIRTY ONE AND 25/100 PESOS (P1,010,031.25), representing backwages, bonuses and the cash value of his vacation leaves from August 16, 1988 to July 21, 1991 (Exh. A). The corresponding withholding tax amounting to P292,636.00 was withheld and remitted by PRC to the BIR on March 10, 1993 (Exhs. B, B-1 and C). On December 28, 1994~ petitioner filed a claim for refund with the BIR, in the amount of P292,636.00, \ a I I eg i ng that the amount received' from PRC are exc I uded from gross income and, therefore, exempt from the income 97(J

DECISION C.T.A. CASE NO. 5194 - 3- tax pursuant to Section 28(b)(7)(8) of the National Internal Revenue Code (NIRC), as amended (Exh. D). On January 30,, 1995, petitioner received a letter from Ms. t AI icia P. Clemeno, Assistant Commissioner of the BIR, dated January 19, 1996 <Exh. E), which partially read as fo I Iows: "In rep Iy, pI ease be Informed that pursuant to Section 28(b)(7)(8) of the Tax Code as amended, the backwages including bonuses paid to you cannot be considered as benefits paid as a consequence of an involuntary separation from the service of the employer within the contemplation of Section 28(b)(7)(8) of the Tax Code but as remunerations from services that would have been rendered by you for your employer prior to 1993 when actually received or during the period of i I legal dismissal from the service which was affirmed by the Supreme Court. Such being the case, said backwages are subject to income tax and consequently to the withholding tax on wages pursuant to Section 72, Chapter 10, Title I I of the Tax Code as Implemented by Revenue Regulations No. 6-82 as amended. However, considering that such backwages and bonuses received constitute remunerations for services that woUld have been performed by your prior to the-- year (1993) when actually received or during the period of your dismissal from the service which no less than the Supreme Court has In effect affirmed to be iII ega I, and having been denied payment of wages when they were due because of circumstances not of your own making and therefore beyond your control, you should report as Income and pay the respective income ..taxes by a I Iocat i ng or spreading the backwages and ~onuses for the years 1988, 1989, 1990 and ,1991 and crediting the corresponding income tax 'withheld from said wage payments excluding the accrued leave pay which has been ruled by the Supreme Court as 971

DECISION C.T.A. CASE NO. 5194 - 4- not subject to income tax. (CIR vs. Court of Appeals and Efren P. Castaneda, G.R. No. 96016) Accordingly, your claim for refund may be processed by this Office upon the submission of the following documents for verification purposes: ~ 1. Certification from your employer showing a breakdown of the total backwages and other benefits received per year in the tdtal amount of P1,010~31.00 including the total amount of withheld taxes; and 2. Certificate/proof of remittance of tax withheld. Please submit the requested documents immediately in order that herein claim can be acted upon." On February 6, 1995, petitioner simultaneously filed an appeal with the respondent, Commissioner of Internal Revenue <Exh. F>, and with this Court. Petitioner is asking this Court to is. sue an order directing the respondent to refund the amount of P292,636.00, representing a I Ieged i I legally withheld income tax plus 6% interest per annum f~om the time the withholding was made up to the time the refund is effected. On March 1, 1995, during the pendency of this case, respondent approved the refund of P113,064.20, pursuant to Section 204 of the NIRC, computed as follows: (Exh. G, Annex "H" of Pet's. Request for Ad~ission, pp. 59-60, CTA record)

DECISION C.T.A. CASE NO. 5194 - 5- "C 0 M P U T A T 0 N 19 88 Gross, Income: P103,950.00 P127,050.00 Backwages 23,100.00 15,000.00 Bonuses P112,050.00 Less: Personal & additional exemptions p 16,567.00 Net Income Tax Due 1989 Gross Income: P277,200.00 Backwages Bonuses 46,200.00 P323,400.00 12,000.00 Less: Personal exemption P311 ,400.00 Net Income p 67.481.00 Tax Due 1990 Gross Income: P277,200.00 P323,400.00 Backwages 46,200.00 12,000.00 Bonuses P311 ,400.00 Less: Personal exemption p 67,481.00 Net Income Tax Due 199 Gross Income: Backwages P154,770.00 P177,870.00 Bonuses 23,100.00 18,000.00 Less: Personal exemption P159,870.00 p 28,043.80 Net Income Tax Due Summary: Tax Due per year: 1988 p 16,567.00 19 8 9 67,481.0~ 1990 67,481.00 991 28,043.00 P179,572.00 292,636.00 Less: Tax Withheld by employer <P113,064.00) Balance <Refundable)

DECISION C.T.A. CASE NO. 5194 - 6- Note: Tax due was computed based on data furnished by taxpayer and employer (PRC> (pis. see pp. 61-76) Taxpayer has no I isted tax I iabi I ity (p. 60)." Not ~atisfied with the partial refund awarded by ~ respondent, petitioner pursued his claim for refund with respect to the balance of P179,572.00 plus 6% interest per annum from the time of withholding up to' the time the ...... refund is effected. Petitioner a I Ieged that backwages and bonuses are not subject to income tax because these are excluded from gross income under Sec. 28(b)(7)(8) of the NIRC. The award for payment of backwages was due as a consequence of his i I I ega I d ism i ssa I . And certainly beyond his control. The issues presented to us are purely legal. First, whether or not backwages and bonuses falls within the purview of Sec. 28(b)(7)(8) of the NIRC. If so, then its is not subject to the withholding tax. Second, if petitioner is found to be entitled to the refund claimed, whether or not petitloner��is entitled to an interest at the rate of 6% from the time of withholding up to the time the amount claimed is refunded. Section 28(b)(7)(8) of the NIRC, provides: "Sec. 28. Gross Income.- x x x. (b) Exclusions from gro~s income. The following items shall not be'included in gross income and sha I I be exempt from taxation under this Title:

DECISION C.T.A. CASE NO. 5194 - 7- XXX XXX X X X. (7) Retirement bene~its, pensions, gratuities, etc. x x x. (B). Any amount rece~ved by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the em p I o y e r d ue t o de at h , s i c k.ne s s o r other physical disabi I ity~r for any cause beyond the c�ontro I of said official or employees." (Underscoring ours.) The exemption contemplated in this provision refers to the amount received by an individual or his heirs on account of his separation due to either: 1 ) death, sickness or other physical disabi I lty; or 2 >. for any cause beyond the control of said official or employee. For all Intent and pur.,Poses, the aforesaid provision of law points at a scenario where there must be actual separation from the . s.. e r v i ce and such separation must be "" beyond the control of said employee. Section 2 of Revenue Regulations No. 6-82, as amended by Revenue Regulations No. 12-86, provides: "(2) Any amount yeceived by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness, or ' other physical d i sab iIi ty or for any other cause beyond the control of the said official or employee, such 975

DECISION C.T.A. CASE NO. 5194 - 8- as retrenchment, redundancy and cessation of business. The phrase 'for any cause beyond the control of the said official or employee' connotes Involuntariness on the part of the official or employee. The separati~n from the service of the official or employee must not be asked for or Initiated by him. Whether or not the separation i~ beyond the control of the said official or employee shal I be determined on the basis of~ prevai I ing facts and circumstances. This shall be duly establ lshed through competent evidence to be submitted by the employer which should be attached in his monthly report for the period in which the amount was paid due to involuntary separation. Any payment made by an employer to an employee on account of dismissal, that is, for causes other than those mentioned in paragraph (b)(2) hereof, constitutes compensation regardless of whether the employer Is legally bound by contract, statute, or otherwise to make such payment." In the case at bar, the Supreme Court has awarded petitioner backwages from August 16, 1988 to July 21, 1991, inclusive of ~I lowances and the monetary equivalent �. of other benefits due him_for that period, as well as his retirement pay and other benefits provided under the employer's (PRC), compulsory retirement scheme. The rationale behind the award of backwages and retirement benefits is stated In thi~ wise: "In this regard, It c-q_uld be concluded that the respondent PRC was merely in a hurry to terminate the services of tKe. petitioner as soon as possible in view of� the latter's 97C

DECISION C.T.A. CASE NO. 5194 9- impending retirement; it appears that said company was merely trying to avoid paying the retirement benefits the petitioner stood to receive upon reaching the age of sixty (60). PRC acted In bad faith. 'X X X XXX X~ X X. Coming to the third assigned error, since We have concluded that the petitioner's dismissal was I I legal and can not be 1ustifled .... under a valid redundancy initiative, Article 283 of the Labor Code, as amended, on the benefits to be received by the dismissed employee in the case of redundancy, retrenchment to prevent Iosses, c Iosure of business or the Installation of labor saving devices, is not applicable. Instead, We apply Art i c Ie 279 thereof which provides, in part, that an 'employee who is unjustly dismissed from work shall be entitled to reinstatement without loss of seniority rights and other privileges and to his full backwages, inclusive of allowances, and to his other benefits or their monetary equivalent computed from the time his compensation was withheld from him up to the time of his actual reinstatement.' In Torillo vs. Leogardo,. Jr., an ampl lflcation was made on Article 279 of the Labor Code and the distinction between separation pay'aryd backwages. Citing the case of Santos vs. NLRC, We held in the former: 'The normal consequences of a finding that an employee has been i I legally dismissed are, firstly, that the employee becomes entitled to reinstatement to his former position without loss of seniority rights and, secondly, the payment of backwages corresponding to the period from his Illegal dismissal up,-; to actual reinstatement. XXX

DECISION C.T.A. CASE NO. 5194 - 10 - Though the grant of reinstatement commonly carries with it an award of backwages, the inappropriateness or non-avai labi I ity ,of one does not carry with it the inappropriateness or non-avai l~bi I ity of the other. XXX Put a little differently, payment� of backwages is a form of rei ie~ that restores the income that was lost by reason of unlawful dismissal; separation pay, in contrast, is oriented towards the immediate future, the transitional period the dismissed employee must undergo before locating a replacement job. I Reinstatement then of the petitioner would have been proper � _H_o_w_e_v_e_r_..,__s__i _n_c_e_h_e_--'-r_e_a_c_h_ed the mandatory retirement age on 21 July 1991, reinstatement is no longer feasible. He should thus be awarded his backwages from 16 August 1988 to 21 July 1991, Inclusive of allowances and the monetary equivalent of the other benefits due him "for that period, plu� retIrement benefIts under the PRC Is comr_~� 1 :;;ory retirement scheme which he would have been entitled to -had he not been i I legally dismissed." (Esoareal vs. National Labor Relations Commission, G.R. N(. 99359, September 2, 1992, 213 SCRA 473, Underscoring supplied.) A distinction has been made between backwages and separation pay. Separation pay is defined as the amount that an employee receives at the time of his severance from the service and is designed '\t..o provide the employee with the wherewithal during the period� that he is looking for another employment. It is computed at least one 97h

DECISION C.T.A. CASE NO. 5194 - 11 - month salary or at the rate of one-half month salary for every year of service, whichever is higher. (Aquino vs. NLRC, G.R. No. 87653, February 11, 1992, 206 SCRA 118; t Santos vs. NLRC, L-76721, September 21, 1987, 154 SCRA 166, 172) It is payable to an employee whose services are val idly terminated as a result of ~etrenchment, .closure of business or disease under Arts. 283 and 284 of the Labo~ Code (A'Prime Security Services, Inc. vs. NLRC, G.R. No. 93476, March 19, 1993, 220 SCRA 142). Articles 283 and 284 of the Labor Code of the Phi I lppines provide as follows: "ART. 283. Closure of establishment and reduction of personnel. The employer may also terminate the employment of any employee due to the Installation of labor savings devIces, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment '"or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the workers and the Ministry of Labor and Emp I oyment at. I east one <1 > month before the intended date~ thereof. In case of termination due to the installation of labor saving devices or redundancy, the worker affected thereby shal I be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business Iasses or f ~nanc i a I reverses, the separation pay shal I be equivalent to one ( 1 > mont h pay or at Ieast one- h.a If ( 1 I 2 ) mont h pay for every year of service,- whichever is 978

DECISION C.T.A. CASE NO. 5194 - 12 - higher. A fraction of at least six (6) months shal I be considered one (1) whole year. ART. 284. Disease as ground for termination. An employer may terminate the services of an employee who has been found to be suffering from any disease tand whose continued employment is prohibited by law or is prejudicial to his health as well as to the health of his co-employees: Provided, That he is paid separation pay equivalent to at least one (1) month salary or to one-half (1{2) month salary for every year of service, w~lchever is greater, a fraction of at least six (6) months being considered as one (1) whole year." An award of backwages, on the other hand, is a remedy intended to rei leve the employee from the loss of earnings that would have accrued to him during the period between dismissal and reinstatement if viable or payment of separation pay if no longer viable. It is a form of rei ief-that restores the Income of the employee that was lost by reason of unlawful dismissal. (Santos vs. NLRC, supra. ) The grant of reinstatement carries with it the award of backwages. - As pointed by the Supreme Court, petitioner would have been reinstated from the service by reason of his iII ega I dismissal. However, since petitioner Is considered retired as of July 21, 1991 1 reinstatement cannot therefore be had. ~nstead, petitioner was awarded the retirement benefits due him for reaching the '\.. compulsory age of retirement on July_~1, 1991. And since petitioner's termination from the service was illegal, it 98(J

DECISION C.T.A. CASE NO. 5194 - 13 - was as if there was no severance from the service because he was paid backwages up to the time of his compulsory retirement~ There being no actual separation unti I after reaching the t Section compulsory age of retirement, 28(b)(7)(B) of the Tax Code does not apply. In other words, the separation contemplated under Section 28(b)(7)(B) Is a val ld severance from the service beyond the control of the employee. Furthermore, Sec. 2 of Rev. Regs. No. 6-82, as amended, speaks of the separation from the service of an employee for reasons beyond his contro I such as retrenchment and redundancy and cessation of business. There being no redundancy, for the case presented before us covers I I legal dismissal, the exemption under Sec. 28(b)(7)(B) does not apply. Moreover, if the payment is ~ In I Ieu of wages, It is not exc Iudab I e from gross income. The backwages and b o n. u s e s ~ received by petitioner for the . period August 16, 1988 to July 21, 1991 are, therefore, subject to the withholding tax on income. The question of whether or not petitioner is entitled to interest at the rate of 6% from the time of withholding unti I final' refund of the amount of P179,572.00 has become moo'$:, considering that \., petitioner's claim for refund cannot- be granted by this Court. 98i

\ DECISION C.T.A. CASE NO. 5194 - 14 - WHEREFORE, the instant petition for review is hereby dismlss~d for lack of merit. Respondent's decisi6n dated January 19J 1995 is hereby affirmed. SO ORDERED. ~�~~o~ ERNES~~D. ACOSTA Presiding Judge Associate CE RT I F I CAT I 0 N I � hereby certIfy that this decIsIon was reached after due consultation with the member of the Court of Tax Appeals in accordance with Section 13, Article VI I I of the Constitution: ... . .. ~(Q.'- Q~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals 982