G.R. No. L-10574; May 28, 1958
PANAY ELECTRIC CO., INC., petitioner, vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

FACTS

Petitioner Panay Electric Co., Inc., a grantee of a legislative franchise under Act No. 2983, as amended, was required under its franchise to pay a franchise tax of 1 ½% of its gross earnings for the first twenty years and 2% for the remaining thirty years. Upon the promulgation of Republic Act No. 39 amending the National Internal Revenue Code, respondent Collector of Internal Revenue required petitioner to pay a franchise tax of 5% instead of 2% of its gross earnings. Under protest, petitioner paid the 5% tax from January 19, 1947, to January 18, 1952, totaling P135,872.67. On March 25, 1952, the Supreme Court held in Philippine Railway vs. Collector of Internal Revenue that the rate in the amended Revenue Code did not apply to holders of franchises fixing a specific tax rate. On April 16, 1952, petitioner demanded a refund of the excess taxes paid. Respondent Collector agreed to refund only the overpayments made within two years prior to the demand (from April 16, 1950), amounting to P64,607.07. Petitioner sought a refund of the full amount. The Court of Tax Appeals, in its decision, ordered a refund only of P50,516.95, covering excess payments from October 18, 1950, to January 18, 1952, holding that the right to recover the balance of P85,355.72 (for payments from January 19, 1947, to July 18, 1950) had prescribed.

ISSUE

Whether the two-year prescriptive period under Section 306 of the National Internal Revenue Code for filing a suit to recover erroneously or illegally collected taxes applies to the refund of excess franchise taxes paid by the petitioner.

RULING

Yes. The Supreme Court affirmed that the franchise tax is an internal revenue tax, and thus, the two-year prescriptive period under Section 306 of the National Internal Revenue Code applies. The Court held that no suit for recovery of any national internal revenue tax erroneously or illegally collected can be begun after the expiration of two years from the date of payment. However, the Court modified the decision of the Court of Tax Appeals. It increased the refundable amount from P50,516.95 to P64,607.07, corresponding to the overpayments made within two years prior to the filing of the claim for refund on April 16, 1952. The Court found that respondent Collector had admitted the overpayment for this period, offered to credit it, and had taken steps to do so, thereby effectively waiving the prescriptive period as to that amount. The claim for the balance of P85,355.72, covering payments made prior to the two-year period, was correctly barred by prescription. The appealed decision was affirmed with this modification.