EN BANC

[G.R. No. 248977. September 28, 2021.]

HON. JED PATRICK E. MABILOG [Substituted by HON. JERRY

P. TREÑAS], City Mayor, Iloilo City, in his capacity as City
Mayor, City of Iloilo, and in behalf of the RANK AND FILE
EMPLOYEES OF THE CITY OF ILOILO , petitioners, vs. THE
COMMISSION ON AUDIT [COA], COA REGIONAL OFFICE NO.
VI and EVELYN P. REYES, in her capacity as Regional
Director, respondents.

DECISION

ZALAMEDA, J : p

Benevolence, magnanimity, or nobility of intention in granting

employee benefits should never sanction the circumvention of a clear and
unambiguous provision of law. Violations of unequivocal budgetary rules and
regulations resulting in the grant of employee benefits that are exorbitant
and arrestive to the financial condition of a local government could be
regarded as gross negligence that would merit a finding of solidary liability
on the part of the officials who approved the grant, and on the part of the
recipients on the ground that they received the same by mistake.
The Case
Challenged via the present petition for certiorari under Rule 64, in
relation to Rule 65, of the Rules of Court are Decision 1 No. 2017-404 dated
13 December 2017 and Resolution 2 No. 2019-038 of the Commission on
Audit (COA) Proper, which upheld the COA Regional Office's decision
affirming the disallowance of the payment of the Productivity Enhancement
Incentive (PEI) to the employees of the City of Iloilo for calendar year (CY)
2009 in the total amount of P46,424,328.24. 3
Antecedents
On 16 December 2009, the Sangguniang Panlungsod of the City of
Iloilo enacted the following ordinances, which paved the way to the grant of
PEI to its officials and employees:
1. Ordinance No. 2009-095 — approved Supplemental
Budget No. 9 of the City for CY 2009, in the total amount of
[P]43,465,085.68, which amount included [P]31,431,648.00 from the
Calamity Fund that was reverted back to the unappropriated surplus
to be used as payment of PEI. From this supplemental budget,
[P]20,001,679.00 was appropriated for the payment of the PEI; and,
2. Ordinance No. 2009-096 — authorized the realignment
of the amount of [P]31,028,321.00 from Personal Services (PS)
Savings to augment the payment of PEI. 4 CAIHTE

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 Pursuant to these ordinances, the City of Iloilo was able to give its
officials and employees PEI in the amount of P30,000.00 each.
However, upon audit, the Audit Team Leader and Supervising Auditor
issued Notice of Disallowance (ND) No. 10-001-100-(09) dated 12 August
2010 disallowing the amount of P46,424,328.24, representing the total
amount of PEI granted to the officials and employees of Iloilo City. The ND
was based on the following reasons:
(a) Only the amount of [P]3,228,671.76 was available to the
city for costs chargeable against the PS Savings based on the
computation of its 45% PS limitation pursuant to Section 325(a) of
Republic Act No. (RA) 7160, 5 and Item 3.0 of the Department of
Budget and Management (DBM) Local Budget Circular (LBC) No.
2009-93 dated 17 December 2009; and
(b) The reversion of the amount [P]31,431,648.00 of the
Calamity Fund back to the unappropriated surplus contravenes Item
No. b.4 of the Implementing Rules and Regulations (IRR) of RA 8185, 6
which requires that the unexpended balance of the Calamity Fund at
the end of the current year be reverted to the unappropriated surplus
only for the purpose of reappropriation during the succeeding budget
year. 7
The following were held liable under the NDs:

Nature of
Name Position/Designation Participation in the
Transaction

1. Hon. Jerry P. Former City Mayor Approved the ordinances

Treñas that appropriated the
funds for PEI.

2. Melchor U. Tan Former City Approved the payrolls

Administrator and disbursement
vouchers (DVs), and
countersigned the
checks.

3. Katherine T. City Treasurer/Asst. Certified the availability

Tingson/Atty. Mary City Treasurer of funds and signed the
Joan V. Montaño checks.

4. Michelle O. City Accountant Certified the

Lopez completeness of the
supporting documents in
the DVs.

5. Joy Ann Assistant City Budget Certified the availability

Toledo/Dionisia S. Officer/Budget Officer of appropriation despite
Gargalicana IV the city exceeding the
45% PS limitation.

6. Ninda D. City Budget Officer Prepared the

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 Atinado Supplemental Budget on
Funds Actually Available.

7. Hon. Jed Patrick Members of the Enacted Ordinance Nos.

E. Mabilog — City Sangguniang 2009-095 and 2009-096,
Vice Panlungsod both dated 16 December
Mayor/Presiding 2009.
Officer Hon.
Eduardo L.
Peñaredondo
Hon. Lyndon V.
Acap
Hon. Eldrid C.
Antiquiera
Hon. Julienne L.
Baronda
Hon. Jose S.
Espinosa III
Hon. Ely A. Estante,
Jr.
Hon. Jeffrey P.
Ganzon
Hon. John Melchor
Mabilog
Hon. Ma. Irene D.
Ong
Hon. Armand S.
Parcon
Hon. Antonio V.
Pesiña, Jr.
Hon. Erwin J.
Plagata
Hon. Nielex C.
Tupas
Hon. Perla S.
Zulueta

8. Hon. Jerry P. Heads and assistant Certified that the

Treñas heads of charges to
Hon. Jed Patrick E. department/offices appropriation/allotment
Mabilog are necessary and lawful
Melchor U. Tan and the supporting
Joy Ann Toledo documents valid, proper,
Katherine T. and legal.
Tingson
Atty. Mary Joan V.
Montaño
Elsie Segaya
Michello O. Lopez
Dr. Tomas J.
Forteza. Jr.
Dr. Julie L. Baronda
Jose Roni SJ.
Peñalosa
Noel Z. Hechanova
Benito T. Jimena
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 Alfredo A.
Villanueva
Dr. Erlinda G.
Gencaya
Romeo Caesar L.
Manikan
Atty. Angelo M.
Geremias
Karl C. Quimsing
Agustin C.
Sangrador, Jr.
Engr. Raul T. Gallo
Edna Querubin
Dr. Urminico M.
Baronda, Jr.
Josegil L. Parreñas
Atty. Edgardo J. Gil
Judge Amalik P.
Espinosa, Jr.
Nelson E. Parreño
Thelma E. Golez

9. Delmo, Rodrigo, Payees Received payment of

et al. (Annex B) the PEI. 8

Mayor Jed Patrick E. Mabilog (Mayor Mabilog), in his capacity as then

City Mayor and in behalf of the rank-and-file employees of Iloilo City
(collectively, petitioners), appealed the disallowance before the COA
Regional Office. He argued that the grant of PEI was motivated by good faith
and by the generosity and magnanimity of Iloilo City to its officials and
employees. According to Mayor Mabilog, most of the funds used in the grant
of the PEI were sourced from PS Savings and partly from Maintenance and
Other Operating Expenses (MOOE), which in no way affected appropriations
for the general services and the welfare of the city. Although Iloilo City may
have exceeded the PS limitation, Mayor Mabilog claimed that the purpose of
the said limitation is the fiscal sustainability of a local government unit
(LGU). 9
The COA Regional Office, through Decision 10 No. 2015-026 dated 29
June 2015, denied petitioners' appeal and affirmed the subject NDs. The
Regional Director explained that under Administrative Order No. (AO) 276, s.
2009, the issuance that sanctioned the grant of PEI for Fiscal Year (FY) 2009,
the PEI released by LGUs shall be subjected to the PS limitation under RA
7160. 11 By Mayor Mabilog's own admission, the City of Iloilo already
exceeded its PS limitation, hence, the disallowance of the PEI was proper. 12
This is bolstered by the similar finding of Officer-In-Charge (OIC) Director
Alfonso B. Bedonia, Jr., of the DBM who reviewed Appropriation Ordinance
No. 2009-095. 13
Citing Casal v. Commission on Audit, 14 the Regional Director ruled that
Mayor Mabilog and the other officials who authorized the PEI cannot invoke
good faith considering that the payment of the benefit is a clear violation of
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 AO 276 and DBM LBC No. 2009-93. 15 Neither could petitioners, as
recipients, claim good faith since they executed waivers that they will return
the amounts received in case of disallowance. 16 Thus, petitioners are liable
to return what they received pursuant to the principle of solutio indebiti. 17
Aggrieved, Mayor Mabilog elevated the matter before the COA Proper.
To justify their prayer for exoneration, petitioners advanced the following
arguments:
1. PEI should not be subjected to PS limitation;
2. There was an error in the computation of PS limitation;
3. The reversion of the Calamity Fund to the unappropriated
surplus for the payment of PEI for CY 2009 is valid;
4. There is legal basis for the grant of the PEI; and
5. The employees and officials of the city received the PEI in
good faith. 18 DETACa

Ruling of the COA Proper

On 13 December 2017, the COA Proper promulgated the assailed
decision affirming the COA Regional Office's ruling, thus:
WHEREFORE, premises considered, the Petition for Review is
hereby DENIED for lack of merit. Accordingly, Commission on Audit
Regional Office No. VI Decision No. 2015-026 dated June 29, 2015,
affirming Notice of Disallowance No. 10-001-100-(09) dated August
12, 2010, on the payment of Productivity Enhancement Incentive for
calendar year 2009 amounting to [P]46,424,328.24, is AFFIRMED. 19
The COA Proper explained that the relevant issuances on the matter,
i.e., AO 276, DBM Budget Circular No. 2009-5, and DBM LBC No. 2009-93, all
provide that the grant of PEI by LGUs shall be subject to the PS limitation.
Moreover, the finding that Iloilo City exceeded its PS limitation is factually
proven as the computation of the remaining amount available to Iloilo City
for its PS costs was corroborated by the OIC Director of DBM, who, in his
review of Administrative Ordinance No. 2009-095, stated that the payment
of PEI for Iloilo City's officials and employees may not be allowed for violating
the provision on the PS limitation and the use of the Calamity Fund. 20
The COA Proper also found no merit in Mayor Mabilog's argument that
the computation of the PS limitation is erroneous because of the non-
deduction from the total PS expenditures of the salaries, wages, and
allowances of officials and employees of public markets and slaughterhouses
that are allegedly considered as economic enterprises, and therefore,
excluded from the computation of PS limitation under the law. According to
the COA Proper, petitioners failed to substantiate their claim by their own
computation. A scrutiny of the computation of the available PS cost made by
the State Auditor showed that no expenditures of the economic enterprises
were included in the computation. 21
Mayor Mabilog moved for the reconsideration of the Decision but the
COA Proper denied the same. Thus, the filing of the present petition. Aside
from seeking the nullification the assailed COA issuances, the petition also
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 contains a motion praying that Mayor Mabilog, who is no longer in public
service, be substituted by the incumbent Mayor of the City of Iloilo,
petitioner Jerry P. Treñas (Mayor Treñas). 22 On 24 September 2019, the
Court issued a Resolution 23 granting the motion for substitution.
Issues
Mayor Treñas now comes before the Court to assail COA Proper's
decision, raising the following issues:
1. The Commission on Audit committed a grave abuse of
discretion in finding that the PEI granted for FY 2009 by Iloilo City
Government to its officials and employees is subject to the Personal
Services limitation provided for under Section 325(a) of R.A. 7160.
2. The Commission on Audit committed a grave abuse of
discretion in failing to appreciate that the reversion of the Calamity
Fund to the unappropriated surplus for the payment of Productivity
Enhancement Incentive for FY 2009 is valid.
3. The Commission on Audit committed a grave abuse of
discretion in failing to appreciate that there is a legal basis for the
City of Iloilo in granting of PEI for FY 2013 [sic].
4. The Commission on Audit committed a grave abuse of
discretion in finding that the government employees and officials of
the Iloilo City Government who received the subject Productivity
Enhancement Incentive did not act in good faith. 24
Ruling of the Court
The Petition lacks merit.
The Court accords respect to, and generally sustains the decisions of
administrative authorities in deference to the doctrine of separation of
powers and also for their presumed expertise in the laws they are entrusted
to enforce. It is only when the COA has acted without or in excess of
jurisdiction, or with grave abuse of discretion amounting to lack or excess of
jurisdiction, that this Court entertains a petition questioning its rulings.
Abuse of discretion is grave when there is an evasion of a positive duty or a
virtual refusal to perform a duty enjoined by law, or to act in contemplation
of law, as, whim, and despotism. 25
To overturn the assailed decision, it must be shown that the COA
committed grave abuse of discretion when it affirmed the NDs for the
payment of PEI to the employees of Iloilo City. Petitioner, however, failed
miserably in this undertaking.
AO 276 and the relevant issuances of
the DBM subject the grant of the PEI
to the PS limitation.
As mentioned, AO 276 authorized the grant of PEI to government
employees, including those in the LGUs, for CY 2009. To clarify the
guidelines in granting PEI to local government personnel, DBM LBC No. 2009-
93 26 was issued, hence:
2.0 Grant of the PEI
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 2.1 The respective sanggunian may grant the PEI to local
government personnel depending on the financial
capability of the local government unit (LGU). The PEI shall
be in lieu of the Additional Benefit/Extra Cash Gift
authorized in previous years.
xxx xxx xxx
3.0 Funding Source
The PEI for local government personnel shall be charged
against LGU funds, subject to the budgetary conditions and Personal
Services limitation in LGU budgets pursuant to Sections 325 (a) and
331 (b) of R.A. No. 7160.
Meanwhile, Sections 325 (a) of RA 7160 provides:
SECTION 325. General Limitations. — The use of the
provincial, city, and municipal funds shall be subject to the following
limitations:
(a) The total appropriations, whether annual or
supplemental, for personal services of a local government
unit for one (1) fiscal year shall not exceed forty-five percent
(45%) in the case of first to third class provinces, cities and
municipalities, and fifty-five percent (55%) in the case of fourth class
or lower, of the total annual income from regular sources
realized in the next preceding fiscal year. The appropriations for
salaries, wages, representation and transportation allowances of
officials and employees of the public utilities and economic
enterprises owned, operated, and maintained by the local
government unit concerned shall not be included in the annual
budget or in the computation of the maximum amount for personal
services. The appropriations for the personal services of such
economic enterprises shall be charged to their respective budgets; ATICcS

xxx xxx xxx (Emphases supplied)

From the foregoing, it is clear that while the PEI shall be charged from
LGU funds, the amount to be given should not exceed the concerned LGU's
PS limitation. The COA found that Iloilo City had already used 44.64% of
their 45% PS limitation and only had P3,228,671.76 to spend for the
PEI given to its officials and employees. Thus, the amount of
P46,424,328.24 appropriated for the PEI is far in excess of what
Iloilo City is only allowed to spend for it.
Mayor Treñas insists that the disallowance of the PEI would be unduly
injurious to the employees considering that petitioners received the same as
a motivational incentive to improve their productivity, as provided by AO
276. Allegedly, had the City of Iloilo known that the PEI is subject to the PS
limitation, the LGU would have been more prudent to ensure that said limit
is not breached. 27
We are not persuaded. It is settled that when the law is clear and
unambiguous, the Court only has to apply the same, nothing more. 28 No
amount of good intention could justify noncompliance with the clear
provision of law. Ignorance of the law of the officials who authorized the
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 payment of the PEI does not excuse their noncompliance. 29

Section 3 of AO 276 is unequivocal that the PEI is subject to the PS

limitation under RA 7160. Thus:
SECTION 3. PEI for Employees of LGUs. — Employees in the local
government units (LGUs) may also be granted PEI by their respective
sanggunian, depending on the LGU financial capability, chargeable
to local government funds, subject to the Personal Services
limitation in their respective local government budgets under
RA No. 7160 and subject further to the conditions in Section 1
hereof. The PEI shall be in lieu of the Additional Benefit/Extra Cash
Gift authorized in previous years. (Emphasis supplied)
Moreover, the allegation of Mayor Treñas that the City of Iloilo is
unaware of the PS limitation is belied by Ordinance No. 2009-096 30 issued
by its own Sangguniang Panlalawigan. The said ordinance made reference to
DBM Budget Circular No. 2009-5, 31 which reiterates, unequivocally, that the
PEI shall be subject to the PS limitation in accordance with AO 276:
6.0 PEI for LGU Personnel
xxx xxx xxx
6.3 The PEI for LGU Personnel shall be charged against LGU
f u n d s subject to the budgetary conditions and
Personal Services limitation in LGU budgets pursuant to
Sections 325(a) and 331(b) of R.A. No. 7160. (Emphasis
supplied.)
Notwithstanding, Mayor Treñas asserts that complying with the PS
limitation in the grant of PEI is violative of the equal protection clause under
the Constitution. Allegedly, employees and officials of LGUs would receive
varying amounts depending on what is left in their PS allocation, and would
effectively discriminate LGUs that could no longer afford granting PEI
because they already reached the limit.
We disagree. This constitutional challenge should not be allowed; the
constitutionality or legality of a law or administrative regulation could only
be assailed in a direct action before a competent court. 32 We ruled in Tan v.
Bausch & Lomb, Inc.: 33
Furthermore, the order of the trial court was a patent nullity. In
resolving the pending incidents of the motion to transfer and motion
to quash, the trial court should not have allowed petitioners to
collaterally attack the validity of A.O. Nos. 113-95 and 104-96. We
have ruled time and again that the constitutionality or validity of laws,
orders, or such other rules with the force of law cannot be attacked
collaterally. There is a legal presumption of validity of these
laws and rules. Unless a law or rule is annulled in a direct
proceeding, the legal presumption of its validity stands. The
trial court's order was consequently null and void. 34 (Emphasis
supplied) TIADCc

Anent the alleged error in the computation of the PS limitation, We

agree with the COA Proper that the allegation of Mayor Treñas is devoid of
any probative value sans competent evidence of what the correct
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 computation is.
Based on the foregoing, We find no grave abuse of discretion on the
part of the COA Proper in affirming the disallowance of the PEI on the ground
that it exceeded Iloilo City's PS limitation. Moreover, the factual findings of
administrative bodies charged with their specific field of expertise, such as
COA, are afforded great weight by the courts. In the absence of substantial
showing that such findings were made from an erroneous estimation of the
evidence presented, they are conclusive, and in the interest of stability of
the governmental structure, should not be disturbed. 35
The portion of the Calamity Fund
allegedly "unexpended" and
"reverted" was erroneously used to
fund the PEI.
Mayor Treñas argues that while the IRR of RA 8185 requires that
unexpended balances of the Calamity Fund should be reverted to the
unappropriated surplus for re-appropriation during the succeeding budget
year, no such provision could be found in the law itself. 36
We do not agree.
RA 8185 was enacted as an amendment to Section 324 of RA 7160. In
particular, said law made available for LGUs the Calamity Fund to defray for
expenses brought about by calamities. As an amendatory law, RA 8185
should not be read in isolation but in conjunction with the other provisions of
the amended law.
Under Section 322 of RA 7160, unexpended balances of appropriations
shall revert to the unappropriated surplus of the general fund at the end of
the fiscal year and would no longer be available except by subsequent
enactment. In this case, the Calamity Fund was erroneously used to
fund the PEI because at the time of its appropriation or realignment
on 16 December 2009, the same could still not be considered as
"unexpended" and "reverted." Section 322 of RA 7160 is clear that
reversion of unexpended balances of appropriation occurs only at the end of
the fiscal year, which is on the 31st of every year according to Section 353
37 of RA 7160. To quote Section 322:

SECTION 322. Reversion of Unexpended Balances of

Appropriations, Continuing Appropriations. — Unexpended balances
of appropriations authorized in the annual appropriations ordinance
shall revert to the unappropriated surplus of the general fund
at the end of the fiscal year and shall not thereafter be available
for the expenditure except by subsequent enactment. However,
appropriations for capital outlays shall continue and remain valid until
fully spent, reverted or the project is completed. Reversions of
continuing appropriations shall not be allowed unless obligations
therefor have been fully paid or otherwise settled. (Emphasis
supplied)
Section 322 attains far more significance when applied to the Calamity
Fund. Section 324 (d) of RA 7160, as amended by RA 8185, provides:
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 (d) Five percent (5%) of the estimated revenue from regular
sources shall be set aside as annual lump sum appropriations for
relief, rehabilitation, reconstruction and other works or services in
connection with calamities which may occur during the
budget year: Provided, however, That such fund shall be used only
in the area, or a portion thereof, of the local government unit or other
areas affected by a disaster or calamity, as determined and declared
by the local sanggunian concerned.
xxx xxx xxx (Emphasis supplied)
Thus, Section 324 (d) implies that the calamity fund should be
available to meet contingencies brought about by calamities until the end of
the fiscal year. Before the expiration of said period, appropriations for
the calamity fund should remain as such and could not be used for
any other purpose. This justifies the provision in the IRR of RA 8185 stating
that the unexpended balance of the Calamity Fund at the end of the current
year be reverted to the unappropriated surplus only for the purpose of
reappropriation during the succeeding budget year. 38
Supplemental Budget No. 9 of Iloilo City for CY 2009, which included
the appropriation for the Calamity Fund for said year, was enacted on 16
December 2009, or before the end of the fiscal year on 31 December 2009.
Hence, at the time of its approval by the Sangguniang Panlungsod under
Ordinance No. 2009-095, the calamity fund was yet to revert to the general
fund. What the Sangguniang Panlungsod did in this case could constitute a
violation of Section 336 of RA 7160 which states that "[f]unds shall be
available exclusively for the specific purpose for which they have been
appropriated." 39 AIDSTE

By disallowing the PEI, the COA did not invalidate the legislative act of
the Sangguniang Panlungsod, rather, it only fulfilled its duty as the guardian
of public funds. Under the constitution, COA is vested with a wide latitude of
powers to examine, audit, and settle all accounts pertaining to the revenue
and receipts of, and expenditures or uses of government funds; to determine
whether the government entities comply with laws and regulations in
disbursing government funds; and to disallow illegal or irregular
disbursements. 40
With the validity of the disallowance finally put to rest, the Court will
now turn its attention to the determination of the liability of those identified
in the ND.
The approving and certifying officers
were grossly negligent in failing to
observe the City of Iloilo's PS
limitation before granting the PEI to
its officials and employees.
I n Madera v. Commission on Audit, 41 the Court had provided a
definitive set of rules (Madera rules) in determining the liability of
government officers and employees being made to return employee benefits
that were disallowed in audit, thus:
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 1. If a Notice of Disallowance is set aside by the Court, no return
shall be required from any of the persons held liable therein.
2. If a Notice of Disallowance is upheld, the rules on return are as
follows:
a. Approving and certifying officers who acted in good
faith, in regular performance of official functions, and with
the diligence of a good father of the family are not civilly
liable to return consistent with Section 38 of the
Administrative Code of 1987.
b. Approving and certifying officers who are clearly
shown to have acted in bad faith, malice, or gross
negligence are, pursuant to Section 43 of the
Administrative Code of 1987, solidarily liable to return
only the net disallowed amount which, as discussed
herein, excludes amounts excused under the following
Sections 2c and 2d.
c. Recipients — whether approving or certifying
officers or mere passive recipients — are liable to return
the disallowed amounts respectively received by them,
unless they are able to show that the amounts they
received were genuinely given in consideration of
services rendered.
d. The Court may likewise excuse the return of
recipients based on undue prejudice, social justice
considerations, and other bona fide exceptions as it may
determine on a case to case basis. 42
Rules 2a and 2b of the Madera rules were based on Sections 38 43 and
39, 44 in relation to Section 43, 45 of the Administrative Code of 1987, 46
which provide that government officials who approved and certified the
grant of disallowed benefits are held solidarily liable to return said disallowed
amount when they are found to have acted in evident bad faith, with malice,
or if they were grossly negligent in the performance of their official duties.
These rules are further anchored on the principle that "public officers are
accorded with the presumption of regularity in the performance of their
official functions — [t]hat is, when an act has been completed, it is to be
supposed that the act was done in the manner prescribed and by an officer
authorized by law to do it." 47 AaCTcI

Interestingly, in The Officers and Employees of Iloilo Provincial

Government v. Commission on Audit 48 (The Officers and Employees of Iloilo
Provincial Government), which similarly involved the disallowance of the PEI
granted to the officers and employees of the Province of Iloilo for CY 2009,
the Court found the approving/certifying officers grossly negligent for their
failure to observe and consider the Province's PS limitation. The Court
explained:
In this case, the Court finds no justification for the failure of the
approving and certifying officials to observe the province's Personal
Services limitation cap. They failed to faithfully discharge their
respective duties and exercise the required diligence resulting to the
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 illegal and excessive disbursements paid to the employees of the
Province of Iloilo. Even if the grant of PEI was not for a dishonest
purpose, the patent disregard of the issuance by the DBM on the
Personal Services limitation constitutes gross negligence, making
them liable for the refund thereof.
Gross negligence has been defined as negligence characterized
by the want of even slight care, acting or omitting to act in a situation
where there is a duty to act, not inadvertently but willfully and
intentionally with a conscious indifference to consequences insofar as
other persons may be affected. As discussed by Senior Associate
Justice Perlas-Bernabe, "[g]ross negligence may become evident
through the non-compliance of an approving/authorizing officer of
clear and straightforward requirements of an appropriation law, or
budgetary rule or regulation, which because of their clarity and
straightforwardness only call for one [reasonable] interpretation."
xxx xxx xxx
Their failure to do so demonstrates a callous frame of mind
without care of the financial health of the Province of Iloilo. Their
indifference to the financial state of the province is made more
evident by the amount in excess of the province's Personal Services
limitation, which is already at Php38,701,198.90 even before the
grant of PEI. With the additional disbursement of Php102.7M due to
the subject benefit, the excess of the province's Personal Services
limitation rose up to roughly Php141.4 million. 49
The same observations could be made here. As previously discussed,
AO 276 is unambiguously explicit and direct that the grant of PEI is subject
to the PS limitation, and no other interpretation could be derived from this
provision. Also, it was already found that the Sangguniang Panlungsod,
through Ordinance No. 2009-096, was already acquainted with DBM Budget
Circular No. 2009-5. Had they really studied said circular, it would have been
instantly apparent that it reiterated that the PEI is subject to the PS
limitation in accordance to AO 276. Indeed, prudence and diligence should
have dictated the approving/certifying officers to check Iloilo City's PS
limitation considering that they appropriated for the PEI the amount of
P46,424,328.24, which is 1,400% larger than P3,228,671.76, or the
sum available in Iloilo's City's PS allocation.
For their gross negligence, the Court finds the approving/certifying
officers solidarily liable for the disallowed amount pursuant to Section 43,
Chapter 5, Book VI of the Administrative Code, which reads:
SECTION 43. Liability for Illegal Expenditures. — Every
expenditure or obligation authorized or incurred in violation of the
provisions of this Code or of the general and special provisions
contained in the annual General or other Appropriations Act shall be
void. Every payment made in violation of said provisions shall be
illegal and every official or employee authorizing or making
such payment, or taking part therein, and every person
receiving such payment shall be jointly and severally liable to
the Government for the full amount so paid or received.
Any official or employee of the Government knowingly
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 incurring any obligation, or authorizing any expenditure in
violation of the provisions herein, or taking part therein, shall
be dismissed from the service, after due notice and hearing
by the duly authorized appointing official. If the appointing
official is other than the President and should he fail to
remove such official or employee, the President may exercise
the power of removal. (Emphases supplied; citations omitted)
The payees are liable to return the
amount they received pursuant to
principle of solutio indebiti.
By promulgating the Madera rules, the Court veered away from the
previously prevalent "good faith doctrine" applied in exonerating passive
recipients, and returned to the basic standpoint of applying the principles of
solutio indebiti and unjust enrichment in determining liability for disallowed
amounts. 50 This Court now views the receipt by payees of disallowed
benefits as one by mistake, thus creating an obligation on their part to
return the same. Further, the Court had interpreted COA Circular No. 2009-
006 51 dated 15 September 2009 as basis to the extent of their liability for
the amount they unduly received, as well as the solidary liability of officers
who are guilty of bad faith, malice or gross negligence in the disbursement
of the disallowed amounts. 52 Thus: EcTCAD

SECTION 16. Determination of Persons Responsible/Liable. —

16.1 The Liability of public officers and other persons for audit
disallowances/charges shall be determined on the basis of (a) the
nature of the disallowance/charge; (b) the duties and responsibilities
or obligations of officers/employees concerned; (c) the extent of their
participation in the disallowed/charged transaction; and (d) the
amount of damage or loss to the government, thus:
xxx xxx xxx
16.1.5 T h e payee of an expenditure shall be
personally liable for a disallowance where the ground
thereof is his failure to submit the required documents,
and the Auditor is convinced that the disallowed
transaction did not occur or has no basis in fact.
16.2 The liability for audit charges shall be measured by
the individual participation and involvement of public officers
whose duties require appraisal/assessment/collection of government
revenues and receipts in the charged transaction.
16.3 The liability of persons determined to be liable under
an ND/NC shall be solidary and the Commission may go against
any person liable without prejudice to the latter's claim against the
rest of the persons liable. (Emphases supplied)
Nevertheless, despite the deletion good faith as a defense available to
passive-recipients, their liability to return disallowed benefits may still be
excepted based on this grounds now embodied in Rules 2c and 2d of the
Madera rules: (1) when the amount disbursed was genuinely given in
consideration of services rendered; (2) when undue prejudice will result from
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 requiring payees to return; (3) where social justice or humanitarian
considerations are attendant; and (4) other bona fide exceptions as may be
determined on a case to case basis. 53
None of these exceptions are present here.
I n Abellanosa v. Commission on Audit (Abellanosa), 54 the Court
explained that for the first exception under Rule 2c to apply, certain
requisites must be present. Thus:
As a supplement to the Madera Rules on Return, the Court now
finds it fitting to clarify that in order to fall under Rule 2c, i.e.,
amounts genuinely given in consideration of services rendered, the
following requisites must concur:
(1) the personnel incentive or benefit has proper basis
in law but is only disallowed due to irregularities that are
merely procedural in nature; and
(2) the personnel incentive or benefit must have a
clear, direct, and reasonable connection to the actual
performance of the payee-recipient's official work and
functions for which the benefit or incentive was intended
as further compensation.
Verily, these refined parameters are meant to prevent the
indiscriminate and loose invocation of Rule 2c of Madera Rules on
Return which may virtually result in the practical inability of the
government to recover. To stress, Rule 2c as well as Rule 2d should
remain true to their nature as exceptional scenarios; they should not
be haphazardly applied as an excuse for non-return, else they
effectively override the general rule which, again, is to return
disallowed public expenditures. 55 (Emphasis omitted) HSAcaE

Abellanosa instructs that the legality of the expenditure is the primary

consideration before a benefit could be considered as genuinely given in
consideration of services rendered. 56 This "legality" includes compliance
with all the legal conditions for the disbursement. Further, the disallowance
should have been the result of some procedural error not affecting the
genuineness of the payout. 57 These circumstances would show that the
payees would have no issue receiving the benefit disallowed were it not for
that minor mistake. 58 Here, the non-observance of the City's PS limitation is
not a mere procedural misstep but a non-compliance of a legal condition,
making it more apparent that the PEI received by the employees and officers
of Iloilo City failed to pass this "legality" test.
The ratiocination in The Officers and Employees of Iloilo Provincial
Government is equally applicable here:
More importantly, the grant of PEI to employees of the
Province of Iloilo for CY 2009 was actually unauthorized for
non-compliance with a legal condition, i.e., financial
capability to the LGU to grant PEI to its personnel. To recall,
DBM Local Budget Circular No. 2009-93 stated that the respective
sanggunian may grant PEI to their personnel "depending on the
financial capability of the local government unit." Such financial
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 capability was dependent on the amount available to the LGU
before exceeding its Personal Services limit.
Needless to say, the Province of Iloilo did not have the required
financial capability to grant PEI in an amount five (5) times more than
the standard. The funding source of the benefit, as identified and
mandated by law, had already been depleted even before granting
the subject benefit. Hence, the disbursement is deemed unauthorized
and illegal. (Emphasis supplied)
As regards the second requisite, Abellanosa explains:
Aside from having proper basis in law, the disallowed
incentive or benefit must have a clear, direct, reasonable
connection to the actual performance of the payee-recipient's
official work and functions. Rule 2c after all, excuses only those
benefits "genuinely given in consideration of services rendered"; in
order to be considered as "genuinely given," not only does the benefit
or incentive need to have an ostensible statutory/legal cover, there
must be actual work performed and that the benefit or incentive
bears a clear, direct, and reasonable relation to the performance of
such official work or functions. To hold otherwise would allow
incentives or benefits to be excused based on a broad and sweeping
association to work that can easily be feigned by unscrupulous public
officers and in the process, would severely limit the ability of the
government to recover. (Emphasis supplied) 59
Moreover, in The Officers and Employees of Iloilo Provincial
Government, We ruled that this clear, direct, and reasonable relation
between the benefit received and the recipient's work or function is an
evidentiary matter, the burden of proving which, belongs to the passive-
recipients. 60 Unfortunately for petitioners, the present petition is bereft of
any evidence to convince Us that such connection exists between the PEI
and the work of the individual recipients.
Neither could passive-recipients be exonerated on the grounds of
undue prejudice, social justice or humanitarian considerations, or other bona
fide exceptions, all of which are subsumed under Rule 2d of the Madera
rules. Abellanosa explains:
The same considerations ought to underlie the application of
Rule 2d as a ground to excuse return. In Madera, the Court also
recognized that the existence of undue prejudice, social justice
considerations, and other bona fide exceptions, as determined on a
case-to-case basis, may also negate the strict application of solutio
indebiti. This exception was borne from the recognition that in certain
instances, the attending facts of a given case may furnish an
equitable basis for the payees to retain the amounts they had
received. While Rule 2d is couched in broader language as compared
to Rule 2c, the application of Rule 2d should always remain true to its
purpose: it must constitute a bona fide instance which strongly
impels the Court to prevent a clear inequity arising from a
directive to return. Ultimately, it is only in highly exceptional
circumstances, after taking into account all factors (such as
the nature and purpose of the disbursement, and its underlying
conditions) that the civil liability to return may be excused. For
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 indeed, it was never the Court's intention for Rules 2c and 2d of
Madera to be a jurisprudential loophole that would cause the
government fiscal leakage and debilitating loss. (Emphasis in the
original) 61
A review of the present petition reveals two reasons advanced by the
petitioners to justify their exoneration: (1) the PEI was granted because of
Iloilo City's benevolence, magnanimity, and desire to motivate its
employees; and (2) to require the officers and employees to return the
amount they received would cause then injury. These reasons would not
suffice as they are not peculiar only to the present case and may very well
apply to many disallowance cases decided or yet to be decided by the Court.
It must be emphasized that employee benefits are, by their very nature,
granted for a benevolent or magnanimous purpose — usually to alleviate the
conditions and welfare of the employees of the granting entity.
Nevertheless, some benevolent purpose are more compelling than
others. By way of example, in Abellanosa, the Court considered the
displacement suffered by employees and the risk to their personal safety
engendered by their being assigned to hazardous areas as highly
exceptional reasons to justify their receipt of the allowance intended to
compensate these risks. 62 While this should not be understood as the only
reasons that the Court finds acceptable, there is simply no justification or
circumstance of this magnitude or importance that is present here. As
regards the injury sustained by the recipients for returning the amount they
received, it was already discussed that pursuant to the principle of solutio
indebiti, this is but a natural and legal consequence of receiving the
disallowed benefit by mistake and without any legal right to do so. HESIcT

WHEREFORE, the petition is DISMISSED. Decision No. 2017-404

dated 13 December 2017 and the Resolution No. 2019-038 dated 28 March
2019 of the Commission on Audit are hereby AFFIRMED. The approving and
certifying officers are solidarily liable for the disallowed amount while the
payees are liable for the amounts they personally received.
SO ORDERED.
Gesmundo, C.J., Perlas-Bernabe, Leonen, Caguioa, Hernando,
Carandang, Lazaro-Javier, Inting, M.V. Lopez, Gaerlan, Rosario, J.Y. Lopez and
Dimaampao, JJ., concur.

Footnotes

1. Rollo , pp. 19-27.

2. Id.

3. Id. at 4-5.

4. Id. at 19-20.
5. Otherwise known as the "Local Government Code of 1991."

6. An Act Amending Section 324 (D) of Republic Act No. 7160, otherwise known as
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 the Local Government Code of 1991.

7. Rollo , p. 20.
8. Id. at 49-50.

9. Id. at 21-22.

10. Id. at 42-47.

11. Id. at 44.

12. Id. at 45.

13. Id.

14. 538 Phil. 634 (2006).

15. Rollo , pp. 45-46.

16. Id. at 46.

17. Id.
18. Id. at 22-23.

19. Id. at 26.

20. Id. at 23-24.

21. Id. at 24.

22. Id. at 6.

23. Id. at 61-63.

24. Id. at 8.

25. See Veloso v. Commission on Audit , 672 Phil. 419, 432 (2011) (Per J. Peralta].
26. Clarificatory Guidelines on the Grant of the Productivity Enhancement Incentive
(PEI) to Local Government Personnel for FY 2009, 17 December 2009.
27. Rollo , p. 10.
28. Association of International Shipping Lines, Inc. v. Secretary of Finance, G.R.
No. 222239, 15 January 2020.

29. See Turks Shawarma Co. v. Pajaron, 803 Phil. 315 (2017).
30. Rollo , pp. 51-52.

31. Id. at 51.

32. See National Association of Electricity Consumers for Reforms v. Manila Electric
Co., 797 Phil. 12 (2016).
33. 514 Phil. 307 (2005).

34. Id. at 316.

35. Lumayna v. Commission on Audit , 616 Phil. 929, 940 (2009).
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 36. Rollo , pp. 12-13.
37. SECTION 353. The Official Fiscal Year. — The official fiscal year of local
government units shall be the period beginning with the first (1st) day of
January and ending with the thirty-first (31st) day of December of the same
year.
38. Emphases supplied.

39. SECTION 336. Use of Appropriated Funds and Savings. — Funds shall be
available exclusively for the specific purpose for which they have been
appropriated. No ordinance shall be passed authorizing any transfer of
appropriations from one item to another. However, the local chief executive
or the presiding officer of the sanggunian concerned may, by ordinance, be
authorized to augment any item in the approved annual budget for their
respective offices from savings in other items within the same expense class
of their respective appropriations.

40. Supra note 36 at 429.

41. G.R. No. 244123, 8 September 2020.

42. Id.
43. SECTION 38. Liability of Superior Officers. — (1) A public officer shall not be
civilly liable for acts done in the performance of his official duties, unless
there is a clear showing of bad faith, malice or gross negligence.

xxx xxx xxx

(3) A head of a department or a superior officer shall not be civilly liable for
the wrongful acts, omissions of duty, negligence, or misfeasance of his
subordinates, unless he has actually authorized by written order the specific
act or misconduct complained of.

44. SECTION 39. Liability of Subordinate Officers. — No subordinate officer or

employee shall be civilly liable for acts done by him in good faith in the
performance of his duties. However, he shall be liable for willful or negligent
acts done by him which are contrary to law, morals, public policy and good
customs even if he acted under orders or instructions of his superiors.

45. SECTION 43. Liability for Illegal Expenditures. — Every expenditure or

obligation authorized or incurred in violation of the provisions of this Code or
of the general and special provisions contained in the annual General or
other Appropriations Act shall be void. Every payment made in violation of
said provisions shall be illegal and every official or employee authorizing or
making such payment, or taking part therein, and every person receiving
such payment shall be jointly and severally liable to the Government for the
full amount so paid or received.
Any official or employee of the Government knowingly incurring any
obligation, or authorizing any expenditure in violation of the provisions
herein, or taking part therein, shall be dismissed from the service, after due
notice and hearing by the duly authorized appointing official. If the
appointing official is other than the President and should he fail to remove
such official or employee, the President may exercise the power of removal.

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 46. Executive Order No. 292, 25 July 1987.

47. Madera v. Commission on Audit , supra at note 42; Emphasis omitted.

48. G.R. No. 218383, 5 January 2021.

49. Id.
50. Madera v. Commission on Audit , supra at note 42.

51. Prescribing the Use of the Rules and Regulations on Settlement of Accounts.

52. Madera v. Commission on Audit , supra at note 42.

53. Id.

54. G.R. No. 185806, 17 November 2020.

55. Id.

56. Id.

57. Id.
58. The Officers and Employees of Iloilo Provincial Government v. Commission on
Audit, G.R. No. 218383, 5 January 2021.
59. Supra note 42.
60. Supra note 55.

61. Supra note 42.

62. Id.

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