CTA Case No. 993 (Decision)

��.t�. �� � 'XC Oli' Tf E' P ILl!.' 'l !'o~� � 'V UR 1' {W 'f'AX ~PE J.;83 UEZ N ClTYf . BUTUAN SA,lHILL , I NC . , Pe t i t ioner, - versus - COliEISS I OrJEn O:i:i' INTE.. NAL J.3V~NDJ::, Respondent. x- - - - - - - - - - - x DECI 8 I 0 N This is an appeal from the dec ision of re- s pendent assessing against and demanding upon-~) e - ti tioner ~.)csment of i-54 , 911 . 54 as alleged deficien- cy franchise tax covering the period from 1948 to 19 59 anc: the fir;:; t quarter of 1960 , inclusive of .the ' 25!; curc'�1arge for late payment thereof , under Sec- t i on 259 of the Ka tional Intern~. J.. Revenue. Code , as amended by Republic ~ct No . 39 , which provides as follmvs: SEC . 259 . Ta:~ on coroo�ra t e f r al1- chises .- There shall be col lected in respect to all existing and future franchises , upon the gross earnings or receipts from the business c overed by the law granting the franchise a tax of five uer c e nt um or such taxes , charges , and percentages as are speci- fied in the special charters of the � cor11orations upon whom such f r anc hises are conferred , �vJhichev er is higher , unless the provislons thereof preclude l:;he imposition of a higher tax . xx xx . On February 15 , 1931 , petiti one r via s gr at1t ed a munici)_)al franc:1ise for electric light , heat and I

DECISION CT CA E NO . 993 2 power service in Butuan, 1 gusan, under the provi- sions of Act No . 667 , as amended by �ct No . 1022 of" the Philippine Legislature (Exh . D, pp. 50- 57-A, BIR rec . ). The said municipal franchise vias super- seded by a legislative franchise (Republic Act No . 399), 'dhich toolc effect on June 18, 191t9 , granted to petitioner by Congress of the Republic of the Philippines . The new franchise covers the munici- palities of Butuan and . Cabadbaran , province of J'l.gu- san , (~h . 1 , p . 64 , CTA rec . ) subject to the terms and conc1i tions established in ii.ct No . 3636 (Model Electric Light and Power Franchise Act) of the Phi- lippine Legislature , as amended by ~r:.1Illon\vealth Act No . 132. Under Section 10 of the said ~ct, the rate of the franchise t ax , t he manner and date of payment thereof, and the exemption from all other taxes read as follm�Js: SEC . 10 . In consideration of the franchise and rights hereby granted the grantee shall pay into the municipal treasury of the municipality in which it is supplying electric current to the pub- lic under its franchise, a tax equal to 2~ of the gross earnings from electric . current sold or supplied under this fran- cnlse in said municipality . Said tax shall be due and payable quarterly and sha'11 be in lieu of any and all taxes of anY kind , nature , or discretion levied, established , or collected by any ~uthorf ity whats oever~ municipal , nrovincial , or insular., novJ or in the future, on its poles, wires, insulators, switches , I

DECISION - CTA CASE NO . 993 3 transformers and structures, installa- tions, conductors, and accessories, placed in a.nd over and under all pub- lic property, including public streets and highways , provincial roads , bridges an~ pub+i9 squar~s Land on its. fran- cpl..se_ ,..1.gnts , -Qrl.Vl.leges, recergt�, revenuas and profits , from� which taxe,? the grantee is hereby expressly exempted . (Underscoring supplied) It is to be noted, hov1ever, that Section 10 of Act No . 3636 of the Philippine Legislatu.re, sunra, granting exemption from any and all taxes of what- ever kind or nature, whether municipal, provincial, \ or national, was amended by Section 259 of the Tax Code , as amended , by virtue of ection 12 of Act No. 3636 , as amended by Section 4 of Commonwealth Act No . 132 , effective on November 6, 1936, which provides as follO\vs: SEC . 4. Section twelve of the form for electric light and power franchises, is hereby liltev1is8 amended so as to read as follows: "SEC . 12. This franchise is granted subject to the provisions of Act No . 3108, as amended, and with the under~tanding and upon the condition that it Shall be subject to amendment, alteration , or re- peal b,y the National Assembl,y or b,y the Congress of the United States, and that it s~all be subject in all respects to the limitations upon corporations and the granting of franchises contained in the Constitution of the Philippines , and also subject to the provisions of Jlct No . 1459 of the Philippine Legislature, as amended . " (Underscoring supplied) On Oc.tober 1, 1946 , Republic Act No . 39, supra, was app�roved by the President of the Re9ublic of ths

DECISION - CTA CASE NO . 993 Philippines�effective on said date . It amended Section 259 of the National Internal Revenue Code by providing for the collection, in respect to all existing and future franchises , of a franchise tax of 5% on the gross earnings or receipts of the franchise grantee as are specified in the special charters of the corJlOra tions upon whom such fran- chises are conferred, whichever is higher, unless the provisions thereof precluded the imposition of a higher rate ot franchise tax. A similar provision is also found in Section 259 of the Revenue Code, as amended by Republic Act No . 418 which took effect upon its approval on June 18, 1949 . On the theory that petitioner is subject to the higher rate of franchise tax ( 5~~ instead of 2%) , ' respondent is sued on September 8 , 1960 -an. assess - ment notice and a letter of demand upon petitioner calling for the payment of �51+ , 911 . 54 as deficiency franchise tax covering the period from 1948 to 1959 and the first quarter of 1960, computed as follows: Gross receipts ������������� �1 , 369 , 383 . 18 5% tax due thereon ����.��.� � 68,469 . 16 Less: Amount already paid �� ~4, 539.93 B a 1 a n c e ������������ � � 3 , 929 . 23 Add: 25% surcharge ��������� 10 , 982 . 31 TOT.t- 1 AHOUNT DUE ����������� [~ 5[~ ' 911 . 5'4 (Exhs . A and 2, p~ 28, BIR rec .) In a letter dated October 4, 1�960, addressed to the Commissioner of Internal Revenue, petitioner con-

DECISION - CTA CASE NO . 993 5 tested the legalfty of the said deficiency franchise tax assessment and requested the withdrawal thereof by alleging that it is only subject to the franchise tax of 2% on its gross earnings under Section 10 of Act No . 3636, su-gra, in relation to its cr.1arter granted under Republic Act No . 399 (Exh . B, pp . 36- 37 , BIR rec . and p . 64, CTA rec .). As the said re- quest for the withdrawa~ of the disputed tax assess- ment ~as denied by respondent , petitioner appealed to th)_s Court . There are two (2) principal questions at issue subrili t ted by the parties to this Court for resolu- 1. VJhether or not the right of re- spondent to assess the deficiency fran- chise tax from 1948 to 1959 and the fir9t quarter of 1960 has partly prescribed under the provisions of Section 331 of the National Internal Hevenue Code, in relation to Section 332(a) of the same Code; and 2. v'fuether or not petitioner is subject to the higher rate of franchise tax ( 5;~ of the gross earnings) imposed by Section 259 of the Revenue Code, as amended by Republic -1.ct Nos . 39 and 418 . Petitioner contends that the deficiency fran- chise tax assessment i~sued by respondent , covering the period from 1948 up to September 10, 1955 , has partly presc~ibed because it was made beyond five (5) years from the date the franchise tax returns we.re filed by petitioner (Petitioner 1 s Hemo ., . p . 21,

D.J:CISIOI~ CT.n C.u.d:::I: NO . 90"") /..J 6 CT~'� r'"'....C � 1.,1....1. � 0/1. ) . ReslJona-.en t coun t ered by alleg1�ng that petitioner failed to adduce satisfactory evi- dence showing that the saiJ returns were file~ during the period covered by th~ assessment; an~ , during the same period, petitioner ' s booLs of accoun~s re- fleeted unrecorJed gross receipts subjPct to the franchise tax . Res~ondent concluded, therefore, that ha ~ts ten (10) years from the discovery of the fraud on August 1 , 1960 within which to assess the deficiency tax in question, under ~ection 332(a) of the fl.evenue Code. The prescriptive periods of tax assessments are enboaied in Sections 331 and 332 of the National In tern<:d Revenue Co.::le which provide as follmvs: 0( ~...u,.. . 33-1 � 1")er,1� od of 1 l.ffi.lGJ_ a t l.on U0or: assess 1SDt and collection.- E.x- cept as ~rovided in the succeeding section, internal- revenue taxes shall be assessed wit~in five years after tl1e return was filed , and no proceeding in court without assessment for the col- lection of such taxes shall be begun ~fter the expiration of such period . For the purposes of this section a re- turn fil2d before the last day pre- scribed by lmv for the filing thereof shall be cons idered as filed on s LJ.ch last Jay: Provided, Ths.t this limitation shall not apply to cases already in- vesti~ated prior to t~e approval of I this Code. SEC . 332 . 3xceotions as to period of 11.mitation of assessnent and co�i- lection of taxes.- (a ) In the case of a false or fraudulent re b1rn vJi th in- tent to evade tax� or of a failure to file a return , the tax ~ay be assessed,

' DECISION - . CT~i. C.\.::E NO . 993 7 or a prcceeding in court for the col- le.ction of such tax ma~r be begun with- out assessment, at any time -v,.rithin ten years after the discovery of the falsi- ty, fraud , or omission. It is very clear from the foregoing provisions of the Revenue Code that internal r.;;venue taxes may .only be assessed within five (5) years after the tax return was filed by the taxpayer, except in cases \vhere the taxpayer willfully failed to file a return or he had filed a false or fraudulent return with the intent to evade the tax due from him . In such casas, the revenue tax may be assessed by re- spondent vii thin ten ( 10) years after the discovery of the falsity , fraud or omission� .F'irst Issue: In support of its stand that respondent ' s assessment has partly prescribedf petitioner pre- sented its accountant as a witness . He testified that, during the period covered by the assessment, it was the practice and procedure of the peti.tioner to pay i t s franchise tax at the time of the fil i ng of the returns (p . 30 , t . s . n . ) . T4e testimony of the said witness is corroborated by the certificate issued by Hr . Francisco Hagno , Acting City Treasurer 0f Bu tuan City, dated January 12, 1961, shov.Jing the item ed gross receipts of petitioner from the first

DECISION - c~:.r:.. Ci1. E NO . 993 8 quarter of 19~9 �to the first quarter of 1960, in- clusive; the amounts of quarte~ly or monthly fran- chise taxes paid by it; and the numbers and dates of the official receipts issued therefor . (Exh. H, pp . 61-63 , CT.t: rec .). ""'ven the letter of Assistant , City Treasurer Francisco T. Concon , dated July 8 , 1966 and addressed to petitioner ' s counsel, indicates that the franchise tax returns filed by petitioner from 19~8 to 1960 were among the old records of his office deposited in the warehouse near the City Engineer ' s Office \vhich were completely burned during the fire that took place at Butuan City in 196 � (Exh. G-1, p . 60 , CTA rec .). :Je are, therefore, satisfied from the evidence of record that petitioner has filed its franchise tax returns during the period covered by respondent ' s assessment . Consequently , under &ection 331 of the Revenue Code , supra, we hold that tee right of respondent to assess petitioner for deficiency franchise tax from 1948 to the first quarte r of 1960 has 1)artly prescribed . In a final bi6 to assail petitioner's defense of the period of limitation prescribed by the Tax Code, respondent alleged that , assumin6 arguendo, the etitioner filed its franchise tax returns, yet the same are false or fraudulent ;:Jith the intent to evade the franchise tax because the said petitioner underdec1arcd its gross earnings during the period

DECISION - CT 'l CaSE NO . 993 -9 covered by the assessment . It is cardinal rule in taxation that fraud is never presumed because it is a serious charge (Yuti- vo Sons Hardware Co . vs . Court of Tax .t-:~.ppea1s, et al ., G. R. No . 1- 13203 , January 28 , 1961); it must be alleged and proved , at least satisfactorily if not conclusively by one \vho alleges its existence (De Hoda vs . Balk , t~S P~1il . 104; De Santos vs . BEi.r.Lk of the Philippine Islands , 66 Phil. 38; Ivienzi e.-:. Co . vs . Bastida , 63 Phil. 16; J~royo vs . Granada A. Cen- tero, 18 Phil. 484) . In the case at bar, the allegations of fraud with the intent to evade the franchise tax has not been proven satisfactorily . The records show that from the fi r st quarter of 1948 to the first quarter of 1960 , th.3 gross receipts of petitioner as a fran- chise grantee amounted to ~1,369 , 383 . 18 . Out of the said amount , only �16 , 799.56 represents the alleged unrecorded and underposted receipts of petitioner . (Exh . 1, p . 27, BIR rec . ) . It is to be noted , how- ever, that a big portion of the unrecorded receipts of [16,799 . 56 was not reflected in the books of ac- counts of petitioner because it represents the cost of the electric current used (free of charge) by tbe officers and employees of the peti tioner. (E.xh . 1- B, p . 11 , BIR rec . ). Under this circumstance, it cannot (

DECISION - CTA CASE NO. 993 10 be charged t hat petitioner intended to defraud the Government of the franchise tax . Nere understatement of the gross earnings does not in itself prov.e fraud . (See Yutivo case, supra, citing James Nicholson , 32 BTA 997 , affirmed 90 F(2i) 978) . Inasmuch as fraud has not been proven satisfac- torily by respondent, the period of limitation is five (5) years from the filing of petitioner ' s. re- turns, according to Section 331 of the Tax Code, � supra . (See Republic of the Philippines vs . Rita Lim De YtJ. , G. R. No . L- 17438 , 1-1.pril 30, 1964) . Conse- quently , t he right of respondent to asses~ the fran- chise tax for the period from 1948 to eptember 8, 1955 had already prescribed , when respondent assessed petitioner on ~ep tember 8 , 1960. Second Issue: Petitioner ' s legislative franchise (Republic ct No . 399), which tool~ effect on June 18, 1949 , was granted pursuant to the Hodel Electric Light and Po�wer Franchise .Act (Act No . 3636 of the Philippine Legislature, as amended by Commonwealth Act No . 132 of the National ssembly) . It is claimed that the provisions of ct No . � 3636 , particularly Section 10 thereof , supra, were incorporated by reference into the petitioner ' s charter . It is novJ argued that ,

DECISION - U-T; CA~E NO . 993 11 since petitioner is only subject to 2j& franchise tax on its gross e~rnin6s in lieu of all other taxes on receipts, revenues and profits , the imposition of the higher rate of franchise tax (5;.-;) und.er Section 259, as amended by Republip ..1-ct H:> . 39, does not legally affect or includ~ the petitioner . To bolster its stand on the legal issue, p~titioner alleged ttat there is no irreconcilable conflict between Section 10 of Act No . 3636 and 3ection 259 of the Tax Code, as amended; the godel J:!.lectri.c LiE;ht an ?ower Fra~1- chise Act, p&rticularly Jection 10 thereof, is a general la1.v al1d., therefore, the provisions of the spe- cial la\v vlill prevail over the general law in case of c onf lie t bet\�Jee n the t~>JO lairJS; and that the de- cisions of the Supreme Court in cases similar to the case at bar, wherein the imposition of the 576 franchise tax was upheld , were not binding to peti- tioner because the sai6 decisions were rendered in the unauthorized exercise of judicial legislati~n. The doctrine enunciated by the Supreme Court in the various decisions rendered by it, and� which vJas assailed by petitioner in its memorandum , reads as follmvs: We find petitioner ' s position un- tenable . �.. e agree that its franchise is, by express provision of its charter, sub- ject to all the terms and conditions ex- I

DECISIOH - ', CTA CASE NO. 993 I 12 _pressed in Act 3636 . But vJe do not be- lieve that the 2 per cent franchise tax originally provided in section 10 of the model franchise set forth in section 1 of said Act had been intended by the Legislature to be part of and incorporated into its charter . The reason is t~2t at the time petitioner ' s franchise was granted (1950), the original 2 per cent tax had already bean increased to 5 per cent by section 259 of the Internal Reve- nue C~de, as amended by Republic ~cts 39 anc 418 . It should be noted that at tha time of the approval of fict 3636 in 1929 , the provisions of the then applicable tax la\'l ( section 1508 of the .ll,dminis tra tive Code of 1917, the source of our present tax Code) was in accord with section 10� of the model franchise (section 1 of Act 3636) in that sec . 1508 provided : S11 ec . 1508 . Tax on corporate franchises . - There shall be collected in respect to all existing and future franchises, upon the gross earnings or re- ceipts from the business covered by the law granting the fran- chise , such taxes, char .:;es, and percentages as_9-re specified in the special charters of the cor- pora tions upon whom such fran- chises are conferred x x x. H This provision was substantially copied in the original section 259 of the Tax Code ,_at the time of its passage in 1939 . But on October 1 , 1946 , becausa of pressing need for increased revenue (See Explanatory Note to H. B. No . 730, Congressional Record , II . R., Vol . 1, No . 69 , pp . 1615-1616) , Congress passed Republic ...~.ct Ho . 39 , amendinG section 259 of the Tax Code to read as follmvs: 11Sec . � 259 . Tax on corporate franchise .- There shall be col- lected in respect to all exist- ing and future franchises , upon

DBCiuiOI�; ., CT~.~. C.t~.~E NO . 993 I 13 the gross earnings or receipts from �the business covered by the law granting the franchise a tax of five per centum or such taxes, charges, and 9ercentages as are specified in the special charters of the corporations upon whom such franchises are conferred, \v~'lichever is hL;her , unless the provisions thereof preclude imposition of a hig:1.er tax x x x:1 Because of the a~p~rent confli~t between sec. 259 of the Gocte as amended. by R. A. 39 (5 per cent) and section 10 of the lno5.el franchise under .~:..ct 3636 ( 2 per cent) the former must be deemed to have modified the latter. Therefore, when petitioner ' s char ter dwerasRep1ya;s_sbeliic and i t s franchise t;>;ranted un k..ct 444 in 195 , the franchise tax payable by it�was already the 5 per cent provided for in section 259 of the Tax Code as amenc:ed . ( Carcar Electric &: Ice Plant Co . , Inc. vs. Coll . of Int. Rev., 100 Phil . 52- 54; bee also Visayan Electric Co . v. Cell . of Int . Rev ., G. R. Nos. 1- 10099 & 1-10100, au,; . 30 , 19 )7 ; ./ortugaliza Jr. v. CT et al ., G. 3 . No . L-8829, Oct . 30, 1957, 102 Phil. 1169-1170;. aQ6 Visayan ec t�r1..c �n.. o . v. Co1�1 . of I nt~- � .~.!.~ev . , G�-R. ~1 .1.:.1 1\fo ~ 1-9685, Oct . 30, 195'7 j 102 Phil. 218- 219) .. e are in accord with t~1e views expressed by th-2 ;:)upreme Court in the cases above-cited . To our mind, however, there is no conflict bet\veen Sec- tion 259 of the Tax Code, as amen~ed, increasing the r& te of the franchise tax of petitioner to 5~~, and Section 10 of Act No . 3636 fixing the rate of franc~ise tax at 2% in lieu of all other taxes . It should be noted that, under Section 12 of J.:Ct No . 3636, as amended by 3ection 4 of CommonvJealth .~.-lt..ct No . 132, supra, effective on =~ovember 6, 1936 , the franchise granted to - petitioner was given "with the understanding and upon th::; condition that it shall

._. I DECI ION - CTA C/l.SE NOO 993 14 be subj ect to amendment, alteration , or repeal by the National Assembly or by the Congress of the United States 11 � It is obvious , therefore , that Section 10 of Act No . 3636 was amended by Section 259 of the Tax Code , as amended, by virtue of Sec- t ion 12 of the same Act, as amended , by reserving to our l egislative department the power t~ amend , alter , or repeal the rate. of the -franchise tax which was fixed at 2% . In effecting such alteration by in- . creasing the frartchise tax to 57; under Section 259 of the Tax Code , as amended by Republic JL ct Nos . 39 and 418 , our Congress has merely exercised a power expressly reserved thereto by petitioner ' s franchise, and has acted, therefore, in conformity therewith , not in violation of the provisions thereof or to the detriment of the rights thereby vested in the peti- tioner herein . ( e- Balafiga Pmver Plant Co . vs . Commissioner of Internal Revenue , G. R. No . 20499 , June 20 , �1965) . .Accordingly , we hold that the impos i- t ion and collection of the higher rate of franchise tax ( 5}&) are just and legal . �.ve have noted , h01tl8Ver, that respondent computed the 5~; frar1chise tax on the gross sales of electric current, plus the value of the elec tric current given free to the officers a�nd employees of petitioner . Since the value of the free lighting services was not

D.2CISIOiJ CTA C~�j,SE NO . 993 15 earned by petitioner from its busi6ess of furnishing electric light, it would seem far-fetched to include and consider the same as part 8f the gross e~rnings of petitioner in computing the 5;; franchise tax. s to the impos i tio:1 of 25;; surcharge for late payment of the franchise tax, suffice it to state the said surcharge may be dispensed �with vJ'here the tax- _:Jayer ' s dela:- to pay the tax \vas in go,pd faith due to misunderstanding of reven�~e reg:.:tla tions or b8cause res_?onc ent h;sued conflictint; rulings as to the rate of franchise tax to be a 1)i:.,lied by the franchise grantee . (Conell Bros . , Co . vs. Collector of Internal Reve!'lue , G. ~ � . I~o . 1- 5470 , December 13, 1963; Imus .Electric v('1O ., l- nc . vs . Court of Tax App_eals and the Commissioner of Internal Revenue, G. R. ~o . L- 22421, Earch 18 , 1967 ; Guat::ua Electric Light ��lant Co . , Inc. vs . Collector of Internal Revenue , et al., G. R. No . L- 23611 , .tli.pril 24 , 1967) . Eoreover, t his Court . can take judicial notice of the fact that in many'fran- chise tax cases submitted to it for review, but b e f ore th c case::; of a T~lTo ~...T..l�. n Co ., I�"t�'c � , u.., . .o.. . l7os . L- 9616 ~ 11703, were decided by the Supreme Court on Xay 25 , 1959, r,sspondent has beGn refunding alleged overpaid f'rat1chi.se tax of 5;; in cases simi lar to the case at bar . 1�:e hold, t"1erefore, tb..at petitioner is not liable for the 25% surcharge .

DECISION - . CT1>. Cli..S:E NO . 993 I I 16 After r .esolving the questions at issue , we find that, from eptember 9 , 1955 to the 1st quarter of 1960 , petitioner is liable for deficiency franchise tax of El0 ,193 . 69 , rcomputed as follows: 1955 11~/365 of f-108 , 173 . 63 �. � �� P. 33 , 785 . 7~ 1956 � � � � � . . � � � � � � � � � � � � � � � � � � � � � 13 2 ' 49LI-- �L~+ 195'7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156' 344. 92 1958 .... . ...................... . 141,660. 34 1959 .. .. ... . .... . ........... .... . ..131 , 340 . 82 1960 (~s \qua:;~~!.' ) ., . .... . . ... . .. ::-,44 , 0~6 . 06 ..rRO..:.b R.l.!..C.r:.l T ����� ���� ��� ~D9 ,672 . 32 5;'; tax thereon . � �� � ������ . �� � 3~, 733 . 62 Less: � ount already paid � . � 24 , 539.*3 D:8FI0IENCY T~: - DUE ��� � ������ �- 10,193 . 9 HCE.::::-'::&.<'0:-=t.J: , the decision of responC:~ent appealed from is hereby modified. eticioner is hereby ordered to pay ras9ondent or his duly authorized collec t ion agent the sum of ?t:10 , l93 . 69 , instead of ~5~ , 911 . 5~ , as deficiency franchise tax covering the period from I 3eptember 9 , 1955 to the 1st quarter of 1960 . 1liit h- out cost::; . ,..0 O..:C3RED uezon City , ugust 15 , 196'7. ~.~cfJa7 .-luc lJ:. O �_1 . ALV.t'~T \.i~ :!.~ J� ssociate Judge ::E CONCUR: ~ ROH~ H H. ffi1ALI Presiding Judge t-~~ - ?'~\.1\:0IT L � .t..VAEC::::a;_. Associate Judge