G.R. No. L-60126 September 25, 1985
CAGAYAN ELECTRIC POWER & LIGHT CO., INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents.

FACTS

Petitioner Cagayan Electric Power & Light Co., Inc. (CEPALCO) holds a legislative franchise under Republic Act No. 3247 , which provides in Section 3 that its payment of a 3% tax on gross earnings is “in lieu of all taxes and assessments of whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers, and insulators.” On June 27, 1968, Republic Act No. 5431 amended Section 24 of the National Internal Revenue Code, making all corporate taxpayers liable for income tax unless specifically exempted, thereby subjecting franchise companies to income tax in addition to franchise tax. Subsequently, on August 4, 1969, Republic Act No. 6020 amended CEPALCO’s franchise by expanding its service area and, in doing so, reenacted the original tax exemption provision.
The Commissioner of Internal Revenue demanded deficiency income taxes from CEPALCO for 1968 to 1971. While assessments for 1970 and 1971 were later cancelled, the Commissioner insisted on those for 1968 and 1969. The Court of Tax Appeals held CEPALCO liable only for income tax covering the period from January 1 to August 3, 1969—the interval between the effectivity of RA 5431 and the enactment of RA 6020. CEPALCO appealed to the Supreme Court.

ISSUE

Whether CEPALCO is liable for income tax for the period from January 1 to August 3, 1969, notwithstanding the tax exemption clause in its legislative franchise.

RULING

Yes, CEPALCO is liable for income tax for the specified period. The Supreme Court affirmed the Tax Court’s decision but deleted the surcharge and interest. The legal logic rests on the legislative power to alter franchises. The 1935 Constitution, applicable at the time, explicitly provides that franchises are subject to amendment, alteration, or repeal by Congress when public interest so requires. CEPALCO’s own franchise, under RA 3247, incorporates this condition by being subject to the provisions of Act No. 3636 , which similarly allows congressional amendment.
Republic Act No. 5431 , a general law amending the Tax Code, effectively withdrew the income tax exemption previously enjoyed by CEPALCO under its franchise. This was a valid exercise of Congress’s power to alter the franchise. However, the subsequent enactment of RA 6020 on August 4, 1969, which amended CEPALCO’s franchise and reenacted its tax exemption, restored that exemption. Consequently, CEPALCO’s liability for income tax existed only during the period when RA 5431 was in effect without the countervailing restoration—specifically from January 1 to August 3, 1969. The Court emphasized that the petitioner’s good faith reliance on its franchise exemption justified the deletion of delinquency penalties, limiting liability to the tax proper.