CTA Case No. 2914 (Decision)

JHLPtlBLlC OF THE PmLTPrJNE'S t COURT OF TAX i PPE:\1!.3 OT'lt70N CiTV CAGAYAN ELECTRIC POWER LIGHT CO., INC., Petitioner,/ - versus - C.T.A. CASE NO . 2914 COHMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - ------X DEC I S I 0 N This is an appeal from the decision of res- pondent Commissioner of Internal Revenue dated October 24� 1977 assessing against petitioner deficiency income tax for the calendar years 1968 and 1969 in the amount of P64,810.32 and P134,091.65, respectively, or a total amount of P198,901.97, inclusive of the ~% and 14% monthly interest. The records show that petitioner is a corpo- ration organized and existing under the laws of the Philippines, with principal office at State Condo- minium Building, Ortigas Avenue, San 1Juan, t-letro Manila. It is a franchise holder under the pro- visions of Republic Act No. 3247 enacted on June 17, 1961 as amended by Republic Act No. 3570 enacted on June 21, 1963 {Exh s.. 0 and 0-1, pp. 190-191 and 188-189, respectively) by virtue of which it was engaged in the operation and distribution of elec- tric light and power in t.he municipalities of 52

DECISION - CTA . CA ~E NO. 2914 - 2- Lagoloan, Opol, Villanueva, Jacaan and the City of Cagayan de Oro. Under the franchise, Congress levied a franchise ta. of 3% on its gross earnings, however , the same franchise provided it shall be exempt from a l l other taxes and assessments. (Sec. 3, R.A. 3247.) On June 27, 1968, Republic Act No. 5431 was e nacted, amend i ng among others Section 24(d) of the Revenue Code, imposing corporate income tax on al l corporations including those previously exempt t here- from and regardless of the provisions of existing special or general laws to the contrary. On August 4, 1969, Republic Act No. 6020 (Exhs. 0-2 and 10, pp. 186-187, BIR rec.) wa s approved, amending the provisions of Republic Act No. 3247 which is the original charter of petitioner. Except with respect to the franchise tax, this amendatory Ac t reiterated the granting of the tax exemption of p e:itioner from all taxes and a s sess- ments. (Sec. 3, R. A. 6020.) In a letter dated February 15, 1973, (Exhs. 5 and E, pp. 112-113, BIR rec.) received by petitioner on March 20, 1973, respondent assessed the petitioner f or alleged def iciency income taxes fo:c the years 1968 to 1971 inclusive as follows: 3 . . . ,.l...); ._

DECISION - CTA r.ASE NO. 2914 - 3- Net income per investigation P185,496.90 Tax due thereon ����������������� 54,924.00 Add: ~% mo. int. fr. 4-16-69 to 4-16-72 ��� ���� ������� 9,886.32 TOTAL AMOUNT DUE & COLLECTIBLE ~=g~~~;k~=~~ Net income per return ����������� P338,471.72 Add: Unallowable deductions: 1. Depn. charges arising from appraisal -~8,777.52 2. Prov. for decline of market value of investment 6,000.00 ~ 1"4,777./52 Net income per investigation . . . . ~353,2.:'c_.~.24 Tax due thereon �.�������.������� Pl13,637.00 Add: ~% mo. int. fr. 4-16-70 to 12-31-72 ����.� 18,466.01 14% interest fr. 1-1-73 to 2-15-73 ��� 1,988.64 20,454.65 TOTAL AMOUNT DUE & COLLECTIBLE ~l~~:!:~:~n=g~ Net income per return ��������.�� ~456,728.66 Add: Un al lowable deduction: Depn. charges ari sing from appraisal of fixed assets (Plant utility ) �� �� ������� -~777.00 Net income per investigation .��� P465,505.66 Tax due thereon ���������.������� P149,777.00 Add: ~% mo. int. fr. 4-16-71 to 12-31-72 Pl5,352.14 14% mo. int. fr. 1-1-73 to 2-15-73 � � � � � � . � 2,621.08 17,973.22 TOTAL AMOUNT DUE AND COLLECTIBLE ~lgz~z~~=~~ 77-ACR-51-70007 8-73/71 Net income per return ����������� P279,446.60 Add: Unallowable deductions: 1. Plane tickets for domestic travel held personal in nature ��������� P10,315.00 2. Depn. charges, arising from appraisal of utili ty plant of fixed assets- 8,777.52 19,092.52 5 �1

DECISION - CTA , CASE NO. 2914 - 4- Net income after investigation �� P298l539.1~ Tax due thereon ��.�����������.�� Add: ~% mo. int. fr . 4-i6-72 to P 94,489.00 12-31-72 ������ � . 4,015.78 5/669 . 33 ~% a. int. fr. 1-1-73 to P100,158.33 2-15-73 �.�� � ��. 1,6.53.55 TOTAL AMOUNT DUE & COLLECTIBLE In a letter dated April 14, 1973 and received by respondent's office on April 16, 1973, petitioner, through counsel, protested the above-mentioned assess- ment for def i ciency income taxes on the grounds t~:at the assessment has no valid basis and violates the tax exemption provision of the petitioner's charter, and that Republic Act No. 5 4 31 which was the basis of the assessment, being a general law did not repeal the special charter of the petitioner. (Exh. F, pp. 114-121, BIR rec.) Petitioner through its counsel, in a letter of May 27, 1974 requested for a specific ruling on the status of petitioner on the basis of its charter and primarily centered on i t s income tax exemp-tion, that is, as to whether it continues to enjoy said exemption with the enactment of Republic Act No. 6020. (pp. 124-126, BIR rec.) On July 25, 1974, respondent replied to the above-mentioned requc~;t for ruling, (Exhs . G and 6, pp. 122-123, BIR rec.) and stated as follows: 5 ;r�) '

DECISION - CTA .CASE NO. 2914 �- 5 - "It may be stated that this office has ta1<.:en the position that under Sec. 24(d) [now Section 24(e) of the Tax Code,_as amended by Republic Act No. 5431_/ even franchise holders whose franc~ise contain a provision that the franchise tax prescribed therein shall be in lien of all taxes are subject to income tax for the taxable years begin- ning after June 30, 1968. However, it is believed that this position only affects franchise holders whose franchise took effect prior to the effectivity of Republic Act No. 5431 on June 27, 1968. Said Section 24(e) insofar as ~ts subjects to income tax aJl franchise holders finds except~on in Republic Act No. 602~ the franchise of your client which took effect on August 4 , 1969~ (Underlining supplied) On the basis of the above-mentioned ruling, the petitioner, through 1ts counsel's letter dated August 12, 1974, received by respondent on August 16, 1974, requested for the cancellation of the deficiency income tax assessment. No reply was ever made by and received from respondent. (Exh. I, p. 127, BIR rec. ) In a letter dated August 29, 1974, petitioner again reiterated its request for reconsideration of the deficiency income tax assessment (Exh. J, pp. 140-143, BIR rec.) by bringing to respondent's attention an opinion of the Secretary of Justice dated August 8, 1974 in which the Secretary ruled in favor of petitioner holding to the effect that the Local Tax Code, which is also a general law, 5G

DECISION - CTA CASE NO. 2914 - 6- did not repeal tne tax exemption provided in the charter of petitioner, which is a special law. (Exh. H, pp. 128-135, BIR rec.) On November 5, 1976, petitioner's counsel again wrote a lPtter to the Chief of the Legal Services of respondent ' s office, citing therein various authorities, to warrant the cancellation of the said deficiency assessment, since for more than two years, �the respondent has not acted on the petitioner's protest. (Exh . L, pp . 146-150, BIR rec.) Petitioner, through C@Unsel, filed on October 3, 1977 another letter dated September 30, 1977 reiterating its protest and request for the cancel- lation of the deficiency income tax assessment on the ground that the issue of whether or not Republic Act No. 5431 has the effect of repealing the charter of petitioner has been squarely decided in the decision rendered by the Court of Tax Appeals in the case of National Power Corporation, CTA Case No. 2183, dated September 30, 1974 1 wherein the Court held therein that "Republic Act No. 5431 does not expressly or literally declare petitioner subject to income tax." On December 14, 1977, counsel for petitioner received the respondent's letter of October 24 1 1977 57

DECISION - CTA , CASE NO. 2914 - 7- in which the assessments for deficiency income taxes for 1970 and 1971 in the amounts of ~167,750.22 and ~100,158.33, respectively, were cancelled, but demanded anew the payment of the sums of f'l64,810.31 and P134,091.65 for the years 1968 and 1969, res- pectively, within ten (10 ) days from receipt of the letter, and stating a l so therein that this letter constitutes its final decision. (Exhs. N and 7, pp. 156-158, BIR rec.) On December 21, 1977, petitioner f i led a peti- tion to review the decision of respondent with our Court alleging that the assessments for 1968 in the amount of ~64,810.32 as deficiency income tax assessment i s illegal and has no valid basis on the ground that Republic Act No. 5431 does not apply to petitioner, which is on a calendar year basis, because although this law was approved on June 27, 1968, the provision of Section 10 thereof provides that "The provisions of this Act shall apply to income for taxable years beginning after June 30, 1968,'' which provision has been judicially construed to mean that in case of corporations with taxable year based on calendar year, the new rates imposed by Republic Act No. 5431 shall apply only to income earned beginning the taxable year of

DECISION - CTA 'CASE NO. 2914 - 8 �- January 1, 1969. (Manila Times Publishing Co., CTA Case No. 2263, Dec. 17, 1973, Cert. Denied, G.R. L-38154, May 10, 1974.) Petitioner further alleges that Republic Act No. 5431 being a general law did not repeal a special law, specifically Republic Act No. 3247, as amended by Republic Act No. 6020, which is the franchise of the petitioner, makin g it liable for 3% franchise tax, and carrying the proviso that it is "in lieu of all taxes of any kind, nature or description." With respect to that assessment for 1969 in the amount of ~134,091.65 1 petitioner assails the same as illegal, without basis, and erroneous on the similar grounds that its franchise, being a special law, with the "in lieu of all taxes of any kind, nature or description" proviso, petitioner continues to be exemp t from the payment of income tax. Even assuming arguendo that Republic Act No . 5431 applies to petitioner, the income of peti- tioner f er the entire year should not b~ taxed in f ull, but only in part, corresponding to the period of the applicability of Republic Act No. 5431. In other words, petitioner should be taxed only from January 1, 1969 to August 3 , 1969. The issues to be resolved are, to wit:

DECISION - CTk CASE NO~ 2914 - 9- 1) Whether or not the franchise tax paid by petitioner is a commutative tax, therefore Republic Act 5431 does not apply to petitioner: 2) Whether or not petitioner 1 s franchise is a contract between the state and the grantee; 3) Whethe r or not the imposition of income tax on income of petitioner is a violation of the non-impairment clause of the constitution; and 4) Whether or not petitioner is liable for the payment of income tax under the provision of the Tax Code, as amended by Republic Act No. 5431. With respect to the first issue, petitioner contends that its franchise, Republic Act No. 3247, as amended by Republic Act No. 3570, is a special franchise and that the phrase therein 11 in lieu of all taxes of any kind, nature or description 11 has been generally considered as a commutative tax, therefore Republic Act No. 5431 should be applied only to corporation wholly exempt from income tax, and not to petitioner~ (Memo. of petitioner, pp. 134-136, CTA rec.) We find petitioner's contention devoid of merit. Although the �_ phrase 11 :~n lieu of all taxes of any kind, nature or descn. ption 11 has been generally considered as a commu�t:ative tax (Phil. Air Lines vs. GO L

DECISION - CTA , CASE NO. 2914 - 10 - Com. of Int. Rev . , CTA Case No. 45, Feb. 8, 1956 citing Corpus Juris 216, Phil. Air Lines vs. Commissioner , CTA Case No. 1943, August 22, 1970) which compounds and corrunu tes for a just equivalent all o �ther taxes, including income tax in view of the "in lieu of any and all taxes'' provisions of its special charter, still Republic Act No. 5431 applies to petitioner. The provision in the Tax Code providing for the general application of the new tax rates under Sec. 24(d), upon "a11 corpo rate taxpayers," not specifically and wholly exempt under Soction 27 of the same Code, was evidently intended apply to general and special corporations enjoying income tax exemp�tion before the enactment of Republic Ac-t No . 5431. In fine, other than those wholly exempted for taxes under Section 24 (c) (1 ) and 27 of the Tax Code, a l l kinds of corporations , whose liability for income tax were covered by general or special statutes are now subject to the rates prescribed in Republic Act No. 5431. Thus, in Koronadal Electric & Power Co . 1 Inc. vs. Commissioner of Internal R.~vemle 1 CTA Case No. 2600, ,June 26, 1979, our Court held �that: I G1 l -

DECISION - CTA ' CASE NO. 2914 - 11 - "Petitioner claims, howe ver, that Republic Act No. 5431 did not repeal or revoke its exemption from income tax because the franchise tax provided in its franchise is a cornrnuta�tive tax, compoundi ng or commuting for a just equi- valent all other taxes, including t he income tax, payable by it, in view o f the "in lieu of any and all taxes" pro-- visions of its special charter. Hence, payment of the franchise tax includes payment of its income tax. Section 24(d) of the National Internal Revenue Code, as amended by Republic Act No. 5431, textually reads; "Section 24. Rates of Tax on Corporations. (d) The provisions of existing special or general laws to the contrary notwithstanding, all corporate t axpayers not spe- cifically exempt under Sections twenty-four(c) (1) and twenty-seven of this Code shall pay the rates provided in this Section. Al l corporations, agencies 1 or instru- mentalities owned or controlled by the Government, including the Government Service Insurance System and the Social Security System excluding educational institutions, shall pay such rate of tax upon their taxable net income as are imposed by this sect ion upon associations or cor- porations engaged in a similar business of industry." Assuming that the liability of peti- tioner for income tax is governed by its franchise or special charter because the franchise t ax payable by it includes the paymen�t of its income tax, it is quite apparent and exp1ic.i.t under the terms of the amendatory law that all corporate tax- payers who se liability or non -liabili �ty for income tax is governed by general or special L

DECISION - CTA CASE NO. 2914 - 12 - laws, unless specifically exempt under sections 24 (c) (1) and 27 of the National Internal Revenue Code, are now required to pay the rates of income tax specified in Section 24 of the Code as amended by Republic Ac -t No. 5431. The amendatory law employs the words "all corporate tax- payers not specifically exempt under Sec- tions 24 (c) (1) and 27 of this Code" - without more. Nothing there said speaks of the exemption of corporations paying a conunut;c;ti ve tax or not paying any income tax prior to the enactment of Republic Act No. 5431. No justification can be found , therefore, for reading into the law an exemption ~1ich is not there. We cannot ignore the principle that express mention in a statute of an exemption precludes reading others into it. (Manila Electric Company vs. Hisael Vera , L--29987, and Manila Electric Company vs. Benjamin Tabios, L-23847, October 22, 1975, 67 SCRA 351, citing Hoard vs. Sears, Roebuck & Co., 122 Conn. 185, 193, 188, A.269)". With respect to the second and third issues, we are wont to dispose of these two issues at the same time since they are i nterrelated with each other. Wi t h respect to these two issues, petitioner maintains that its franchise is a contract between the sta te a nd the grantee and that the imposition of income tax on the i ncome earned from the operation of peti t ion er 1 s franchi se , is violative of �the con s titutional provisj_o n t hat " no law impairing the obligation of cont~ racts shall be passed". (Art. 1 11, Sec. 10 , 1 935 Constitution; Se e Memo- rand um of Petitio ne r, pp. 136-149 , CTA rec.) 63

DECISION - CTA , CASE NO. 2914 - 13 - The stand of petitioner is not meritorious. Petitioner's franchise (Rep. Act No. 3247, as amended by Rep. Act 3570 and further amended by Rep. Act No. 6020) is subject to the terms and conditions of Act 3636 (Sec. 12), which contains a reservaLion clause, as follows: "Sec . 12. This franchise is granted subject to the provisions of Act Numb9red Three thousand one hundred and eight, as amended, and with the understanding and upon the condition that it shall be sub- ject to amendment, alter- Limitations ation, or repeal ~M the National Assembly or by the Congress of the United States, and that it shall 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 Act Numbered Fourteen hundred and fifty-nine 11 of the Philippine Legislature, as amend~d." Moreover, Section 8, Article XIV of the 1935 Philippine Constitution provides that "no franchise or right shall be granted to any individual, firm or corporation except under the condition that it shall be subject to amendment, alteration, or re- peal by the National Assembly (now Congress) when the public interest so requires." Furthermore, Section 5 of Article XIV of the New Philippine Constitution substantially reproduces the above, when it provided therein that "neither shall any such franchise, or right to be granted

DECISION - CTA.CASE NO. 29 14 - 14 - except under the condition that it shall be sub- ject to amendment, alteration, or repeal by the National Assembly when the public interest so requires". From the above statements of the law, we could glean that Congress (now National Assembly) reserves the right to amend, alter, modify or re- pe al petitioner's franchise. So that when the franchise of petitioner was granted, the latter is deemed to have accepted the same with full knowledge of the reservation clause. These issues are not new to us. In Koronadal Electric Light & Power Co., Inc., supra, our Court held that there can be no impairment of the obliga- tion of contracts within the meaning of the Cons- titution where the grantee of the franchise accepted it, subject to the right of the grantor to alter, modify or repeal the same . Thus, in said case it was held that. : "This argument at once loses potency on the face of Section 8, Article XIV of the 19 35 Constitution, under \vhose au�thori ty the franchise of petitioner was granted, which provides that "No franchise or right shall be granted t o any individual , firm, or corporation, except under the condition that it shall be subject to amendment, alteration, or repeal by Congress when the public inter- est so re ~ uires." s �t a t ed otherwise, the power of Congress to amend the franchis e , as 65

/ DECISION -- CTA 'CAS E NO. 2914 - 15 - provided in the Constitution, is deemed to be a part of said franchise. (Hoa Hin vs. David, 105 Phil. 783; Lealda Electric Co., Inc. vs. Commissioner of Internal Revenue, L-16428, April 30, 1963, 7 SCRA 728; Imus Electric Co. vs. Court of Tax Appeals, L-22421, March 18, 1967, 19 SCRA 612; Guagua Electric Light vs. Co l lector of Internal Revenue, L-23611, April 24, 1967, 19SCRA 790) Indeed, Section 1 of petitioner's franchise, Republic Act 466, explicitly provided: "Section 1. Subjec�t to the terms and conditions established in Act Numbered Thirty-six hundred and thirty-six~ as amended by Commonwealth Act Numbered One hundred and thirty-two, and to the provisions of the Constitution, there is granted to Jose Catolico, for a period of twenty-five years from the approval of this Act, the right, privilege and authority to construct, maintain, and operate an electric light, heat and power plant for the purpose of gene- rating and distributing electric light , heat and/or power for sale within the Municipality of Buayan, Province of Cotabato: }2rovicl9d, That the holder of the franchise herein granted shall start the operation thereof within one and half years from approval of said franchise." And in Section 12 of said Act No . 3636, which took effect on December 7, 1929, it provides the following: "Sec. 12. This franchise is granted subject to the pro- visions of Act Numbered Three thousand one hundred ancl eight , as amended, an_9._vlith t,Jle_}-md~r _st�J.ldin q __an9...Jmon the cond ition

DECISION - CTA CASE NO. 2914 - 16 - t.hat it shalLJ2e. subject �to amendment.~ alte,Lation, or re- peal by the National Assembly or by the Congr~ss of the United States , and that it shall be subject in all res- pects to the linli tat ions upon corporations and _the _srrantiq_g of franchise contained in the Const;Ltu.tion of the Philippj.nes, and also subject to the pro- visions of Act Numbered Four- teen hundred and fifty-nine of the Phi lippine Legislature, as amended , (Act No . 3636, Perma- nent a nd General Statutes, Vol. I, p. 682, 1971 ed., empha- sis supplied. ) Accordingly, when petitioner accepted its franchise it did so with the understand- ing that the Constitutional and statutory reservations of the right of Congress, of the National Assembly, to amend, alter, modify or repeal petitioner's franchise when public interest so requires became an unwritten condition thereof. Such constitutional and statutory provisions constitute part of the obligation of con- tracts. As aptly observed by respondent, it is clear from the above-quoted provisions that Congress reserved the right to amend, alter, modify or repeal petitioner's fran- chise. Since the franchi se was accepted by petitioner with full knowledge of the reservation clause, there can be no impair- ment of the obligation of contracts within the meaning of the Constitution, where the grantee of a franchise accepted it, subject to the right of �che grantor to alter, amend, modify or repeal the same. (Balanga Power Plant Co ., Inc., vs. Commissioner of Internal Revenue, CTA Case No. 979, September 19, 1976; G.R. No. L-20499 , June 30, 1965, 14 SCRA 604, cited in Visayan Electric Co. vs . Commissioner of Internal Revenue, CTA Case No. 1105, May 29 , 1963; Escudero Electric Service Co. vs. Benjamin Tabios , as Commissioner of Internal Revenue, CTA Case No . 1026, G7

DECISION - CTA, CASE NO. 2914 - 17 -� G.R. No. L-23014, June 30, 1970, 33 SCRA 547; Manila Elec�tr ic Co ., Inc., vs. Com-- missioner of Internal Revenue, L-29987 & L-23847, Oct ober 22, 1975, 67 SCRA 351- 352.) The imposition of the Corporate income tax as prescribed by Republic Act No. 5431, amending Section 24(d) of the National Internal Revenue Code, upon petitioner is not, therefore violative of the constitutional provision tha�t no law impairing the obligation of contracts shall be passed. Anent the fourth issue, and with respect to the year 1968 , pe ~itione r is not liable for defi- ciE-ncy income tax under Section 24(d) of the Tax Code, as. amended by Republic Act No. 5431, since Section 10 of said Republic Act No. 5431 states that 11 the provisions of this Act shall apply to income for taxable years beginning after June thirty nineteen hundred sixty-eight. , which provision has b een interpreted by our Court to mean that in the case of corporations reporting their income on the calendar year basis, like petitioner herein, the provision refer to i ncomes taxable beginning the calendar year from J a nuary 1, 1969 . (Manila Times Publishing Co. vs. Co~~issioner, CTA Case No. 2053, Dec � � 1 7 1 1 9 7 3) � With respect to the year 1969, petitioner is liable to deficiency :t.ncome tax under said Republic Act No. 5431, that is J from January 1 to August 3, 1969 since petitioner 1 s franchise, Republic Act f.' ['\ '0 <.)

DECISION - CTA, CASE NO. 2914 - 18 - No. 3570, was again amended by Republic Act No. 6020 on August 4 , 1969, which provided the tax exemption of petitioner from all other taxes. Petiti oner is, therefore, l i able to deficiency income tax only from January 1 to August 3, 1969. Since there is no dispute as to the unallow- able deductions contained in the a ssessment for t he year 1969 1 pursuant to the recomputation submitted by responden t (p. 198, CTA rec.), we find petitioner liabl e for the payment of P75,149.73, representing deficiency income t ax covering the period from Januar y 1 to August 3, 1969,inclusive of surcharge and interests, incident to deli nquency under Section 51(e) of the National Internal Revenue Code. WHEREFORE, petitioner is h ereby o r dered to pay respondent Commission er of Internal Revenue the sum of P75,149.73, repres e nting deficiency income tax for the peciod cover ing January 1 to August 3, 1969, plus surcharge and interest which have accrued thereon incident to delinquency, pur- suant to Section 51(e) of the National Internal Revenue Code. With costs against petitioner.

.. DECISION - CTA CASE NO. 2914 - 19 - SO ORDERED . Quezon City, February 26, 1982. WE CONCUR: ) Presidin ~~ Associate Judge 70