G.R. No. L-23081 - Commissioner of Internal Revenue vs. Ilagan Electric and Ice Plant, Inc.

Respondent Ilagan Electric & Ice Plant, Inc. is the holder of a franchise under Acts Nos. 3407 and 3494, as amended by C.A. No. 258, authorizing it to operate and maintain an electric light, heat, and power system in the Municipality of Ilagan, Isabela.
Based on a letter-ruling dated December 8, 1954, from the Deputy Collector of Internal Revenue, respondent was instructed that it was liable only for a 2% franchise tax under its legislative franchise, instead of the 5% imposed under Section 259 of the National Internal Revenue Code.
For the period October 1, 1955, to September 30, 1959, respondent paid its franchise tax at the lower 2% rate on its gross receipts, despite having previously paid the higher 5% rate under the Tax Code.

Respondent claimed a refund for the excess payment made when the 5% was initially applied, resulting in a refund of P2,520.67 for the period from the 4th quarter of 1952 to the 4th quarter of 1954.
On July 27, 1961, the petitioner, representing the Commissioner of Internal Revenue, issued an assessment holding the respondent liable for franchise tax at the higher 5% rate pursuant to the Hoa Hin decision (May 25, 1959), which held that in the absence of an express exemption clause, the higher tax rate was binding on franchise grantees.
Following the new assessment, the petitioner demanded the repayment of the previously refunded sum of P2,520.67.
A final assessment was issued on January 5, 1962, demanding a total of P8,495.23 as deficiency franchise tax for the period October 1, 1955, to September 30, 1959, plus a 25% surcharge and the repayment of the refunded amount.

Respondent filed a petition for review of the Commissioner’s assessment and decision with the Tax Court on February 16, 1962.
During the hearing, respondent accepted its liability for the deficiency franchise tax amounting to P8,495.23.
The Tax Court eliminated the 25% surcharge, following earlier decisions that penalizing the respondent for the error induced by the deputy’s ruling would be unjust.
The Tax Court further ruled that the petitioner’s right to collect the refunded amount of P2,520.67 was barred by the five-year prescriptive period provided in Sections 331 and 332(c) of the Tax Code.

The sole issue raised on appeal was whether the recovery of the deducted refunded amount of P2,520.67 was barred by the five-year prescriptive period of the Tax Code.
The petitioner contended that rather than the five-year period under the Tax Code, the six-year prescriptive period for quasi-contracts under Article 1145 of the Civil Code should apply, suggesting that a quasi-contract (solutio indebiti) existed between the government and the taxpayer due to the erroneous refund.
The contention for applying the Civil Code was previously rejected in related jurisprudence, notably in the Guagua Electric Light Co., Inc. case.

Whether the government's (petitioner’s) recovery of the refunded franchise tax (P2,520.67) is barred by the five-year prescriptive period as provided under Sections 331 and 332(c) of the Tax Code.

Whether, in view of the quasi-contractual relationship (solutio indebiti) between the government and the taxpayer, the six-year prescriptive period under Article 1145 of the Civil Code should apply instead of the Tax Code’s specific five-year period.