Gross Earnings, Taxability Of; Miscellaneous Incomes; Sale of Properties

August 13, 1970 BIR RULING NO. 041-70 Gross earnings, taxability of; miscellaneous incomes; sale of properties . This is with reference to the queries of one of your members, the Bayawan Electric Corporation, (hereinafter referred to as Corporation) stated as follows: "1. Are we still exempt from paying the income tax? Presently, we are paying the 5% Franchise Tax on the monthly gross income regardless of whether the light bills are paid by our customer or not. Some bills even go to bad debts. Is it right to record only those bills which are being actually paid by the customers for the current month? "2. Are miscellaneous incomes from installations, repairs, and like services, also subject to 5% franchise tax? Is it necessary to record those incomes together with the light bills or income from sales of electric power? "3. Are we supposed to pay a 5% tax or capital Surplus, or profit derived from the sale of an Old engine? Or is this kind of profit subject to payment of an income tax? In reply, I have the honor to inform you as follows: By by virtue of its franchise, Republic Act. No. 496 which incorporates by reference Act 3636 (Model Electric Light and Power Franchise Act), the corporation which is paying the franchise tax is exempt from the income tax on its gross receipts or earnings. (Corcar Electric & Ice Plant Co., Inc. vs. Collector of Internal Revenue, G.H. No. 1-9257, October 17, 1956). This exemption from income tax still stands notwithstanding the amendments of Section 24 of the Tax Code by Republic Act No. 3431 which subject all corporate taxpayers not specifically exempt under Section 24 (c) (1) and 27 of the Tax Code to the payment of income tax. This is so because, to hold otherwise would be violative of the Constitutional provision on the impairment of the Obligation of contracts. Gross earnings for purposes of the franchise tax include uncollected or written-off bills. (Escudero Electric Service Company vs. Commissioner G.H. No. L-23014, June 30, 1970 citing Phil. Long Distance Telephone Co. vs. Collector of Internal Revenue, G.R. No. L-3222 Jan. 21, 1952). Accordingly, the amounts due from customers which are uncollected or written off or carried in the books are subject to the franchise tax. Such being the case, the corporation should record not only the bills which are actually paid by the customers for the current month, but also bills which were not collected or paid. Miscellaneous incomes like those from installations, repairs, and like services, should be returned together with the light bills or income from sales of electric power for purposes of the franchise tax for the reason that the aforesaid incomes are derived from transactions which do not constitute independent businesses. (Ruling, June 25, 1952; Bulletin Vol. 1, No. 2 June 30, 1952.) The income or profit derived from the sale of an old engine is not subject to the 5% franchise tax because under the provisions of Section 10 of Act 3636 cited above, the franchise tax payable by the corporation shall be based on the gross earnings from electric current sold or supplied to the franchise tax, said profit is subject to income tax because the exemption of the grantee from all other taxes is predicated on the payment of the franchise tax, which shall be in lieu of the tax ordinarily due on the gross earnings or income. In other words, if the gross earnings or income is not taxable under the franchise, then such earnings or income are subject to income tax.