Case Summary (G.R. No. L-23081)
Facts of the Case
Ilagan Electric & Ice Plant, Inc. holds a franchise under Acts No. 3407 and 3494, as amended by C.A. No. 258, which permits it to operate an electric supply business in Ilagan, Isabela. The Respondent was initially informed by the Deputy Collector of Internal Revenue, via a letter ruling dated December 8, 1954, that it was liable to pay only a 2% franchise tax instead of the higher 5% rate specified in Section 259 of the National Internal Revenue Code. Relying on this ruling, the Respondent paid its taxes accordingly for the period from October 1, 1955 to September 30, 1959, after having paid the higher rate in prior years. Subsequently, the Petitioner erroneously refunded P2,520.67 to the Respondent, reflecting the difference between the taxes paid at the higher rate and the applicable lower rate.
Legal Proceedings and Tax Assessment
On July 27, 1961, the Petitioner reassessed the Respondent, demanding payment of the higher 5% franchise tax in accordance with the Supreme Court's ruling in a previous case. The assessment was based on the argument that the higher rate is applicable to franchise grantees lacking specific exemption clauses in their legislative franchises. Following this, a final demand was issued for the payment of deficiency franchise tax totaling P8,495.23, which included the previously refunded amount. The Respondent subsequently filed a petition for review with the Tax Court, acknowledging its liability for the underlying franchise tax but contesting the surcharge and the recovery of the refunded amount.
Tax Court’s Ruling
The Tax Court upheld the Respondent's argument that the Petitioner’s right to recover the erroneously refunded P2,520.67 was subject to the five-year prescriptive period specified in the Tax Code, thus prohibiting Petitioner from successfully pursuing the recovery. The Tax Court eliminated the surcharge based on the unfairness of penalizing the Respondent due to the misleading information provided by the Petitioner’s deputy.
Issue of Prescription
The primary legal issue before the Supreme Court was whether the recovery of the erroneously refunded sum was barred by the five-year prescription period under the Tax Code. The Petitioner posited that the Tax Court ought to have applied the six-year prescription period for quasi-contracts established under Article 1145 of the Civil Code, contending that the circumstances constituted a quasi-contractual relation governed by provisions regarding mistaken payments.
Supreme Court Analysis
The Supreme Court affirmed the Tax Court’s decision by establishing that the Petitioner’s demand for recovery amounted to an assessment of deficiency franchise tax, hence it was governed by the specific provision
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Background of the Case
- The case involves an appeal by the Commissioner of Internal Revenue regarding the decision of the Court of Tax Appeals (CTA).
- Ilagan Electric & Ice Plant, Inc. operated under a franchise from the government to provide electric light, heat, and power services in the Municipality of Ilagan, Isabela.
- Based on a ruling from the Deputy Collector of Internal Revenue, Ilagan Electric paid a franchise tax at a lower rate of 2% for the period from October 1, 1955, to September 30, 1959, instead of the higher 5% rate mandated by the National Internal Revenue Code.
Refund and Subsequent Assessment
- Ilagan Electric had previously paid the 5% franchise tax but claimed a refund based on the Deputy Collector's ruling, receiving P2,520.67 as a refund for the period from the 4th quarter of 1952 to the 4th quarter of 1954.
- However, on July 27, 1961, the Commissioner assessed Ilagan Electric for the 5% franchise tax, citing a legal precedent that required the higher tax due to the absence of exemption clauses in their legislative franchise.
- The Commissioner demanded repayment of the refunded amount and issued a final assessment on January 5, 1962, requiring payment of P8,495.23, inclusive of a 25% surcharge.