BIR Ruling No. 414-61

No date supplied BIR RULING NO. 414-61 Attached is the entire docket, consisting of 53 pages, of the . . . (hereinafter referred to as MHEP for short), bearing on the deficiency franchise tax for the period from May 1, 1945 to June 30, 1960 in the total amount of P . . ., which amount includes the franchise tax erroneously refunded to it by this Bureau on June 18, 1954, with the following comment on the legal issues involved. It appears that MHEP is a municipal franchise grantee under Resolution No. 16 dated February 15, 1924 granted by the Municipal Council of Mabalacat, Pampanga, authorizing it to operate and maintain electric light plant in the same municipality, subject to the provisions of Act No. 667, as amended. It appears further that the municipal franchise in question prescribed a franchise tax rate of 1% on its gross earnings for the first twenty (20) years of its existence and 2% for the remaining fifteen (15) years (par. No. 9, Resolution No. 16; p. 46, BIR rec.). The franchise so provides further that "Este privilegio se concede en la inteligencia y bajo las condiciones de que estara sujete a ser reformado , alterado y derogado per el Congreso . . ., y estara sujeto, ademas, a las disposiciones de la Ley No. 2507 y sus enmiendas. . . ." (par. 11, Resolution No. 16; p. 46, BIR rec.). In other words, the grantee or his successors-in-interest agreed to the condition imposed that the franchise in question may be subject to amendment, alteration or repeal by any subsequent act of Congress of the Philippines. On October 1, 1946, Section 259 of the National Internal Revenue Code was amended by Republic Act No. 39 and later on by Republic Act No. 418 on June 18, 1949, the pertinent portion of which provides as follows: xxx xxx xxx Applying the provisions of Section 259 abovequoted to the case in question, there is no doubt that the rate imposed by the law is "higher" than the rate imposed by the municipal charter of MHEP. Accordingly, the rate of 5% shall apply to and be imposed upon, and paid by, the MHEP to the National Government. (Refer also to BIR Rulings Nos. 171 and 248, s. 1961) The question now arises as to whether or not the Government can still collect the deficiency franchise tax still due from MHEP covering the period from May 1, 1945 to June 30, 1960. aisadc As a general rule, internal revenue taxes shall be assessed within five (5) years after the return was filed, if any (Sec. 331, Tax Code). However, where the return filed was false or fraudulent, the tax (franchise tax in this case) may be assessed, or the collection of such tax may be made without assessment, at any time within ten (10) years after the discovery of the falsity or fraud (Sec. 332(a), Tax Code). In case of failure to file a return, assessment of the tax may be made also within ten years from the discovery of such omission. The collection of taxes must be made within five (5) years from the time of assessment (Sec. 332(c), Tax Code). If no return was filed, collection of taxes, by proceeding in court, may be made within ten (10) years from discovery of such omission even without assessment. (Sec. 332(a), Tax Code) Our records show that the deficiency franchise tax in the amount of P . . . (excluding the amount actually refunded to the taxpayer) for the years from May 1, 1945 to June 30, 1960 was legally assessed on February 28, 1961, the date when the taxpayer was notified of the same (pp. 28 to 30, BIR rec.). On the question of prescription to collect the deficiency tax for earlier periods, however, we cannot possibly apply correctly the pertinent provisions on prescription (Secs. 331 and 332, N.I.R.C.) as above-explained in view of the absence of copies of the returns of the MHEP in our attached docket. On this point, therefore, it is necessary to ascertain whether or not the MHEP has filed the corresponding return covering the period in question, and thereafter recompute the correct amount of deficiency franchise tax, plus surcharge, by excluding those periods already barred by prescription. It appears that the amount of P . . was actually refunded to MHEP under Treasury Warrant No. . . dated June 18, 1954, representing the alleged erroneous over-payments made for the period from the 4th quarter of 1951 to the 3rd quarter of 1953. As already stated, such refund of P . . . was erroneously made by this Bureau. Unfortunately, however, the error was discovered long after our right to recover the same has prescribed. We have ruled (BIR Ruling No. 305, s. of 1961) in another case that "Under the provisions of Section 308 of the Tax Code, this Bureau can institute a civil action for the recovery of taxes, including of course the taxes erroneously refunded, but there is no specific provision in the same Code as to the prescriptive period within which the Government may file or institute judicial action for recovery of tax erroneously refunded. Our recourse, therefore, is to consult the provisions of the New Civil Code of the Philippines. "Under Article 2155, in relation to Article 2154, of the New Civil Code, it is substantially provided that where payment has been made by reason of a mistake in the construction or application of a doubtful or difficult provision of law, the obligation on the part of the recipient to return it arises. In other words, there exists a quasi-contract relationship (between the Government and taxpayer) as a result of the erroneous refund, known as solutio indebiti , defined by Manresa as follows: LLjur 'Solutio indebiti is "a tie or juridical relation which, by virtue of a payment of what is not due, made through mistake, is created between the person who paid and the one who received the payment, compelling the latter, in consequence thereof, to return that he has received." "The civil action, therefore, upon a quasi-contract must be commenced within six (6) years (Art. 1142, par. 2, N.C.C.) form the day the action could have been brought (Art. 1150, N.C.C.). "Applying the foregoing provisions of law in the instant case, our right of action to recover the amount actually refunded by reason of a mistake in the construction or application of a doubtful question of law shall commence on the day following the actual refund made by this Bureau." Accordingly, computing the 6-year prescriptive period from June 18, 1954 (date of refund), our right to recover the sum of P . . . from MHEP had already prescribed on June 18, 1960. LLphil xxx xxx xxx