RE: REQUEST OF ATTY.
BERNARDO ZIALCITA FOR RECONSIDERATION OF THE
ACTION OF THE FINANCIAL AND BUDGET OFFICE.
The case of Atty. Bernardo Zialcita, he was an employee of the Court who applied for
retirement benefits and who questioned the deductions on the benefits given to him.
Atty. Zialcita, rendered government service from 1962 up to 1990. He reached the
compulsory retirement age of 65 years. Upon his compulsory retirement, he is entitled
to the commutation of his accumulated leave credits to its money value.
A resolution of the Court En Banc was issued regarding the amounts claimed by Atty.
Bernardo F. Zialcita on the occasion of his retirement.
"The terminal leave pay of Atty. Zialcita received by virtue of his compulsory retirement
can never be considered a part of his salary subject to the payment of income tax but
falls under the phrase `other similar benefits received by retiring employees and
workers’, within the meaning of Section 1 of PD No. 220 and is thus exempt from the
payment of income tax
Court Resolved to (1) ORDER the Fiscal Management and Budget Office to REFUND
Atty. Zialcita which was deducted from his terminal leave pay as withholding tax;
Commissioner of Internal Revenue, as intervenor-movant and through the Solicitor
General filed a motion for clarification and/or reconsideration with this Court. chanroblesvirtualawli
Issue: The issue here is the tax treatment of the commutation of his accumulated leave credits
(terminal leave pay) of Atty. Zialcita is valid.
Held: No. 1) Upon his compulsory retirement, he is entitled to the commutation of his
accumulated leave credits to its money value. Within the purview of Section 28(B)(7)(b) [ now
Section 32(B)(6)(B) ] of the NIRC, compulsory retirement may be considered as a “cause
beyond the control of the said official or employee”. Consequently, the amount that he received
by way of commutation of his accumulated leave credits as a result of his compulsory
retirement, or his terminal leave pay, falls with the enumerated exclusions from the gross
brary
income and is therefore not subject to tax. 2) The terminal leave pay of Atty. Zialcita may
likewise be viewed as a "retirement gratuity received by government officials and employees"
which is also another exclusion from gross income as provided for in
Section 28(b), 7(f) of the NIRC. A gratuity is that paid to the beneficiary for past
services rendered purely out of generosity of the giver or grantor. (Peralta v.
Auditor General, 100 Phil, 1051 [1957]) It is a mere bounty given by the
government in consideration or in recognition of meritorious services and springs
from the appreciation and graciousness of the government. (Pirovano v. De
la Rama Steamship Co., 96 Phil. 335, 357 [1954]) When a government employee
chooses to go to work rather than absent himself and consume his leave credits,
there is no doubt that the government is thereby benefited by the employee's
uninterrupted and continuous service. It is in cognizance of this fact that laws
were passed entitling retiring government employees, among others, to the
commutation of their accumulated leave credits. That which is given to him after
retirement is out of the Government's generosity and an appreciation for his having
continued working when he could very well have gone on vacation. Section 286
of Revised Administrative Code, as amended by RA 1081, provides that "whenever
any officer, employee or laborer of the Government of the Philippines shall
voluntarily resign or be separated from the service through no fault of his own, he
shallbe entitled to the commutation of all accumulated vacation and/or sick leave
to his credit: xxx." (Underlining supplied) Executive Order No. 1077, mentioned
above, later amended Section 286 by removing the limitation on the number of
leave days that may be accumulated and explicitly allowing retiring government
employees to commute their accumulated leaves. The commutation of
accumulated leave credits may thus be considered a retirement gratuity, within
the import of Section 28(b), 7(f) of the NIRC, since it is given only upon retirement
and in consideration of the retiree's meritorious services. It is clear that the law
expresses the government's appreciation for many years of service already
rendered and the clear intention to reward faithful and often underpaid workers
after the official relationship had been terminated.
