Cagayan Electric v. CIR (1985) Case Digest

CAGAYAN ELECTRIC v.
CIR
G.R. No. L-60126

September 25, 1985
Aquino
FACTS
Cagayan Electric Power & Light Co., Inc. (Cagayan Electric) is the holder of a legislative franchise, R.A.
No. 3247. Under this franchise, its payment of 3% tax on its gross earnings from the sale of electric
current is “in lieu of all taxes and assessments of whatever authority, upon privileges, earnings, income,
franchise, and poles, wires, transformers, and insulators of the grantee, from which taxes and
assessments the grantee is hereby expressly exempted.” (In other words, exempt sila from paying
income tax)
Thereafter, R.A. No. 5431 amended Section 24 of the Tax Code. The amendment made liable for income
tax all corporate taxpayers not specifically exempt the law, notwithstanding the provisions of existing
special or general laws to the contrary. Thus, franchise companies (like Cagayan Electric) were
subjected to income tax, in addition to franchise tax. (In other words, hindi na sila exempt)
However, for Cagayan Electric, its franchise was amended by R.A. No. 6020, effective on August 4,
1969. The amendment authorized Cagayan Electric to furnish electricity to the municipalities of Villanueva
and Jasaan, Misamis Oriental. This is in addition to Cagayan de Oro City and the municipalities of
Tagoloan and Opol. The amendment also reenacted the tax exemption in its original charter, or
neutralized the modification made by R.A. No. 5431 more than a year before. (In other words,
exempt na naman sila)
Because of this, CIR required Cagayan Electric to pay deficiency income taxes for 1968 to 1971. This
was contested by Cagayan Electric. The CIR then cancelled the assessments for 1970 and 1971, but
insisted on those for 1968 and 1969.
Cagayan Electric then filed a petition for review with CTA. The CTA held that Cagayan Electric is not
liable for the assessments on 1968. However, it is still liable for income tax for the period from January 1
to August 3, 1969 (before the passage of R.A. No. 6020), which reiterated its tax exemption.
Cagayan Electric thus contends the franchise tax it paid is a commutative tax, which already includes the
income tax. Furthermore, R.A. No. 5431, as amended, altered or repealed Cagayan Electric’s franchise.
Its franchise is a contract, which cannot be impaired by an implied repeal.
ISSUE: W/N Congress validly impaired, by law, Cagayan Electric’s legislative franchise by making it liable
for income tax from which it was originally exempted by virtue of the exemption under the same franchise
RULING: Yes, Congress validly impaired, by law, Cagayan Electric’s legislative franchise.
Article 14, Section 8 of the 1935 Constitution provides that a franchise is subject to amendment, alteration
or repeal by the Congress when the public interest so requires.
In this case, Cagayan Electric’s franchise (R.A. No. 3247) provides that it is subject to the provisions of
the Constitution and to the terms and conditions established in Act No. 3636. Act No. 3636 provides that
the franchise is subject to amendment, alteration or repeal by Congress.
To reiterate, R.A. No. 5431 amended Section 24 of the Tax Code by subjecting to income tax all
corporate taxpayers not expressly exempted therein. This had the effect of withdrawing Cagayan
Electric’s exemption from income tax.
However, take note of the subsequent enactment of R.A. No. 6020 on August 4, 1969. This reenacted
the said tax exemption. Therefore, the Court of Tax Appeals was correct in holding that the exemption
was restored. Thus, Cagayan Electric is liable only for the income tax for the period from January 1 to
August 3, 1969, when its tax exemption was modified by Republic Act No. 5431.
It is relevant to note that franchise companies, like the Philippine Long Distance Telephone Company
(PLDT), have been paying income tax in addition to the franchise tax.
However, the 1969 assessment appears to be highly controversial. At the outset, the CIR was not certain
as to Cagayan Electric’s income tax liability. Cagayan Electric had reason not to pay income tax because
of the tax exemption in its franchise. Because of this, it should be liable only for tax proper, and should not
be held liable for the surcharge and interest.

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CAGAYAN ELECTRIC v.

G.R. No. L-60126

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