Cagayan Electric Power vs. CIR, 138 S 629

223 Phil.
211
SECOND DIVISION
[ G.R. No. 60126, September 25, 1985 ]
CAGAYAN ELECTRIC POWER & LIGHT CO., INC., PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX
APPEALS, RESPONDENTS.

DECISION
AQUINO, J.:
This is about the liability of petitioner Cagayan Electric Power & Light Co., Inc. for income tax
amounting to P75,149.73 for the more than seven-month period of the year 1969 in addition to
franchise tax.

The petitioner is the holder of a legislative franchise, Republic Act No. 3247, under which its
payment of 3% tax on its gross earnings from the sale of electric current is "in lieu of all taxes
and assessments of whatever authority upon privileges, earnings, income, franchise, and poles,
wires, transformers, and insulators of the grantee, from which taxes and assessments the grantee
is hereby expressly exempted" (Sec. 3).

On June 27, 1968, Republic Act No. 5431 amended section 24 of the Tax Code by making
liable for income tax all corporate taxpayers not specifically exempt under paragraph (c)(1)of
said section and section. 27 of the Tax Code notwithstanding the "provisions of existing special
or general laws to the contrary". Thus, franchise companies were subjected to income tax in
addition to franchise tax.

However, in petitioner's case, its franchise was amended by Republic Act No. 6020, effective
August 4, 1969, by authorizing the petitioner to furnish electricity to the municipalities of
Villanueva and Jasaan, Misamis Oriental in addition to Cagayan de Oro City and the
municipalities of Tagoloan and Opol. The amendment reenacted the tax exemption in its
original charter or neutralized the modification made by Republic Act No. 5431 more than a
year before.

By reason of the amendment to section 24 of the Tax Code, the Commissioner of Internal
Revenue in a demand letter dated February 15, 1973 required the petitioner to pay deficiency
income taxes for 1968 to 1971. The petitioner contested the assessments. The Commissioner
cancelled the assessments for 1970 and 1971 but insisted on those for 1968 and 1969.

The petitioner filed a petition for review with the Tax Court, which on February 26, 1982 held
the petitioner liable only for the income tax for the period from January 1 to August 3, 1969 or
before the passage of Republic Act No. 6020 which reiterated its tax exemption. The petitioner
appealed to this Court.
It contends that the Tax Court erred (1) in not holding that the franchise tax paid by the
petitioner is a commutative tax which already includes the income tax; (2) in holding that
Republic Act No. 5431 as amended, altered or repealed petitioner's franchise; (3) in holding that
petitioner's franchise is a contract which can be impaired by an implied repeal and (4) in not
holding that section 24(d) of the Tax Code should be construed strictly against the Government.
We hold that Congress could impair petitioner's legislative franchise by making it liable for
income tax from which heretofore it was exempted by virtue of the exemption provided for in
section 3 of its franchise.
The Constitution provides that a franchise is subject to amendment, alteration or repeal by the
Congress when the public interest so requires (Sec. 8, Art. XIV, 1935 Constitution; Sec. 5, Art.
XIV, 1973 Constitution).
Section 1 of petitioner's franchise, Republic Act No. 3247, provides that it is subject to the
provisions of the Constitution and to the terms and conditions established in Act No. 3636
whose section 12 provides that the franchise is subject to amendment, alteration or repeal by
Congress.
Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax all
corporate taxpayers not expressly exempted therein and in section 27 of the Code, had the effect
of withdrawing petitioner's exemption from income tax.
The Tax Court acted correctly in holding that the exemption was restored by the subsequent
enactment on August 4, 1969 of Republic Act No. 6020 which reenacted the said tax
exemption. Hence, the petitioner is liable only for the income tax for the period from January 1
to August 3, 1969 when its tax exemption was modified by Republic Act No. 5431.
It is relevant to note that franchise companies, like the Philippine Long Distance Telephone
Company, have been paying income tax in addition to the franchise tax.
However, it cannot be denied that the said 1969 assessment appears to be highly controversial.
The Commissioner at the outset was not certain as to petitioner's income tax liability. It had
reason not to pay income tax because of the tax exemption in its franchise.
For this reason, it should be liable only for tax proper and should not be held liable for the
surcharge and interest. (Advertising Associates, Inc. vs. Commissioner of Internal Revenue and
Court of Tax Appeals, G.R. No. 59758, December 26, 1984, 133 SCRA 765; Imus Electric Co.,
Inc. vs. Commissioner of Internal Revenue, 125 Phil. 1024; C. M. Hoskins & Co., Inc. vs.
Commissioner of Internal Revenue, L-28383, June 22, 1976, 71 SCRA 511.)
WHEREFORE, the judgment of the Tax Court is affirmed with the modification that the
petitioner is liable only for the tax proper and that it should not pay the delinquency penalties.
No costs.
SO ORDERED.
Concepcion, Jr., Abad Santos, Escolin, Cuevas, and Alampay, JJ., concur.
Source: Supreme Court E-Library | Date created: November 21, 2014
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