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CIR v Castaneda (G.R. No.

96016)
FACTS:
Efren Castaneda retired from govt service as Revenue Attache in the Philippine Embassy, London,
England. Upon retirement, he received benefits such as the terminal leave pay. The Commissioner of
Internal Revenue withheld P12,557 allegedly representing that it was tax income.
Castaneda filed for a refund, contending that the cash equivalent of his terminal leave is exempt from
income tax.
The Solicitor General contends that the terminal leave is based from an employer-employee relationship
and that as part of the services rendered by the employee, the terminal leave pay is part of the gross
income of the recipient.
CTA -> ruled in favor of Castaneda and ordered the refund.
CA -> affirmed decision of CTA. Hence, this petition for review on certiorari.
ISSUE:
Whether or not terminal leave pay (on occasion of his compulsory retirement) is subject to income tax.
HELD:
NO. As explained in Borromeo v CSC, the rationale of the court in holding that terminal leave pays are
subject to income tax is that:
. . commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or
employee who retires, resigns or is separated from the service through no fault of his own. In the exercise
of sound personnel policy, the Government encourages unused leaves to be accumulated. The
Government recognizes that for most public servants, retirement pay is always less than generous if not
meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided.
Terminal leave payments are given not only at the same time but also for the same policy considerations
governing retirement benefits.
A terminal leave pay is a retirement benefit which is NOT subject to income tax.

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