CIR vs. CA G.R. No. 95022 207 March 23, 1992 SCRA 487 Tax Exemption


Petitioner, seeks a reversal of the Decision of respondent CA, dated Aug. 27, 1990, in CA-G.R. SP No. 20426, entitled “Commissioner of Internal Revenue vs. GCL Retirement Plan, represented by its Trustee-Director and the Court of Tax Appeals,” which affirmed the Decision of the latter Court, dated 15 December 1986, in Case No. 3888, ordering a refund, in the sum of P11,302.19, to the GCL Retirement Plan representing the withholding tax on income from money market placements and purchase of treasury bills, imposed pursuant to Presidential Decree No. 1959.

There is no dispute with respect to the facts. Private Respondent, GCL Retirement Plan (GCL, for brevity) is an employees’ trust maintained by the employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan as submitted was approved and qualified as exempt from income tax by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No. 4917.


Are school’s retained earnings tax-exempt?


Yes. GCL Plan was qualified as exempt from income tax by the CIR in accordance with Rep. Act. 4917. The tax-exemption privilege of employees’ trusts, as distinguished from any other kind of property held in trust, springs from Section 56(b) (now 53[b]) of the Tax Code, “The tax imposed by this Title shall not apply to employee’s trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees . . .” And rightly so, by virtue of the raison de’etre behind the creation of employees’ trusts. Employees’ trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against certain hazards to which members of the Plan may be exposed. It is an independent and additional source of protection for the working group. What is more, it is established for their exclusive benefit and for no other purpose.

It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings would result in a diminution accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law. There can be no denying either that the final withholding tax is collected from income in respect of which employees’ trusts are declared exempt (Sec. 56 [b], now 53 [b], Tax Code). The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source. If an employees’ trust like the GCL enjoys a tax-exempt status from income, we see no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place.

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