BIR Ruling [DA-294-96]

July 30, 1996 BIR RULING [DA-294-96] Ms. Taciana B. Espejo c/o Bureau of Export Promotion Department of Trade & Industry 5th to 8th Floors, New Solid Bldg., 357 Sen. Gil Puyat Avenue, Makati City M a d a m : This refers to your letter dated January 30, 1996 stating that pursuant to E.O. No. 133 dated February 27, 1987, the Department of Trade & Industry and its attached agencies were reorganized. The National Cottage Industry Development Authority (NACIDA) was reorganized into Cottage Industry Technology Center (CITC) and other functions were transferred to the Bureau of Small and Medium Business Department (BSMBD) and relevant line operating units of the Department; that you were aggrieved by the implementation of E.O. 133 since you were separated from the service by a mere notice of termination signed by the Chairman of the CITC placement committee; that you were not given equal opportunity/preference for appointment to the new positions in the approved staffing pattern; that an appeal case was filed in the DTI Appeal Board for violation of R.A. 6656 vis-a-vis E.O. 133, also in the Civil Service Commission (CSC) and RTC-NCR Makati Branch; than on April 10, 1990 the CSC promulgated the order to reinstate you to a comparable position; and that on November 15, 1990 the RTC-NCR Makati Branch 135 orders the respondent (DTI) to immediately restore the petitioner to her position without loss of seniority rights and with back salaries computed under the new staffing pattern from the dates of invalid terminations. Based on the foregoing representations, you are now requesting for a ruling whether the backwages (differentials) and other benefits awarded to you for the years (1987 to 1993) are exempt from income tax and consequently from the withholding tax on wages. In reply, please be informed that under Section 38 of the Tax Code, if the taxpayer is an individual, the net income shall be computed on the basis of the calendar year. All items of income shall be included in gross income or gross compensation income, as the case may be, for the taxable year in which received by the taxpayer except those expressly excluded and already subjected to the final income tax, and exemptions as well as deductions taken accordingly pursuant to Sections 21, 28 and 29 in relation to Section 39 all of the Tax Code, as amended. Salaries, commissions, tips, directors fees, and other forms of compensation are income in the year received, and not in the year earned. (par. 717, p. 231, U.S. Master Tax Guide 1969) Thus, a taxpayer whose income is from salary or the like is required to file his income tax return on the cash basis. However, considering that such backwages (differentials and other benefits constitute remunerations for services that would have been performed by you prior to the year 1995 when actually received, or during the period of your dismissal from the service which the CSC the RTC-NCR, Makati Branch 135 have ruled to be illegal, it is felt that a liberal construction of the statute is called for in this particular case if only to protect employees who, in fact, had been deprived of the payment of her wages and other form of remuneration, from the payment of a tax heavier than what should have been imposed if their employer had promptly met its obligation. In the case of "Commissioner of Internal Revenue v. Joseph G.R. Robillard & Margaret H. Robillard" (C.A.., 308 F. 2d 518, 159) it was held that income received by a taxpayer in 1957 as "back pay" or additional pay for services rendered to his employer for the period from July 1, 1955 through December 1, 1956 which indubitably, would have been paid prior to 1957 except for the intervention of an event similar in nature to a dispute as to the liability of the employer to pay the remuneration in question, is entitled to a special treatment and was properly allocable to taxable years 1955 and 1956 . Accordingly, having been denied payment of your wages when they were due because of circumstances not of your own making and, therefore, beyond your control, you come within the scope of the inequity for which this ruling is precisely designed to remedy. aisadc In view of the foregoing considerations, this Office is of the opinion as it hereby holds that you should report as income and pay your respective income taxes thereon by allocating or spreading your back wages (differentials) and other benefits through the years from your illegal dismissal to the actual reinstatement. (BIR Ruling No. 057-83 dated April 12, 1983) Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Rev. Executive Assistant Legal Service