G.R. No. L-22421; March 18, 1967
IMUS ELECTRIC CO., INC., petitioner, vs. HON. COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL REVENUE, respondents.

FACTS

On June 23, 1930, the Municipal Council of Imus, Cavite, under authority of Act No. 667 , granted Imus Electric Co., Inc. a franchise to operate an electric plant. The franchise imposed a tax of one percent (1%) of gross receipts for the first twenty years and two percent (2%) for the next fifteen years. After the effectivity of Republic Act 39 on October 1, 1946, which amended Section 259 of the Tax Code to impose a five percent (5%) franchise tax on gross earnings or the rate specified in the franchise, whichever is higher, the petitioner paid franchise tax at the 5% rate. In 1953, it filed a claim for refund of payments made at the 5% rate for the period July 1, 1948, to December 31, 1951, which was partially granted. On February 24, 1961, the Commissioner of Internal Revenue assessed the petitioner for deficiency franchise tax at the 5% rate plus surcharge for the period July 1, 1948, to September 30, 1960. A subsequent assessment dated September 28, 1961, was issued for the period January 1, 1956, to September 30, 1960, amounting to P24,752.26 in deficiency tax plus a 25% surcharge. The petitioner sought review from the Court of Tax Appeals, arguing that applying Section 259 impaired its franchise contract in violation of the Constitution and that the franchise, as a special law, was not repealed. The Court of Tax Appeals affirmed the Commissioner’s decision, citing the Lealda Electric Co. case.

ISSUE

Whether Section 259 of the Tax Code, as amended by Republic Act 39, repealed the corresponding tax provision in petitioner’s franchise and is applicable to the petitioner.

RULING

Yes. The Supreme Court affirmed the decision of the Court of Tax Appeals, holding that Section 259 of the Tax Code, as amended, applied to the petitioner. The franchise was granted under Act No. 667 , which expressly reserved the power of Congress to alter, modify, or repeal it. The amendment by Republic Act 39, which imposed a higher tax rate, was a valid exercise of this reserved power and did not constitute an impairment of contract. The Court cited the Balanga Power Plant Co. case, which involved a similar franchise granted under the same law, and ruled that the legislative alteration was in conformity with the franchise’s own terms. The Hidalgo case was deemed inapplicable as it concerned tax rates after a franchise extension, not the applicability of Section 259. However, the Court eliminated the 25% surcharge, ruling that the petitioner’s delay in payment was in good faith due to a misunderstanding of the applicable regulations. The tax liability was thus reduced to P24,752.26.