COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. VICTORIAS MILLING CO., INC., AND THE COURT OF TAX APPEALS, RESPONDENTS.

Commissioner of Internal Revenue versus Victorias Milling

The Case

This is a petition brought by the Commissioner of Internal Revenue against Victorias Milling Company and the Court of Tax Appeals, asking the Supreme Court to overturn a judgment of the tax court that had ordered the Commissioner to refund a portion of specific taxes paid on oils and fuels used in agriculture. The case matters because it fixes the reckoning point of the two-year prescriptive period for tax refunds: when the tax was legally collected, the period runs not from the date of payment but from the supervening cause that gave rise to the right of refund, and both the administrative claim and the appeal to the tax court must be brought within that period.

Procedural History

Victorias Milling filed its claim for refund with the Commissioner of Internal Revenue, who allowed it in part and denied it in part. The taxpayer then appealed to the Court of Tax Appeals, which took the taxpayer's view and rendered judgment ordering the Commissioner to refund the denied amount. From that judgment the Commissioner appealed to the Supreme Court, maintaining that the two-year period under Section 306 of the Tax Code applied and had already lapsed.

Facts

Republic Act 775, which took effect on June 18, 1952, amended Section 142 of the National Internal Revenue Code so that the specific tax on manufactured oils and other fuels used in agriculture during the five years from June 18, 1952 shall be refunded by the Commissioner of Internal Revenue to the extent of fifty percent.

On December 23, 1957, Victorias Milling filed a claim for the refund of 12,464 pesos and 53 centavos, representing fifty percent of the specific tax paid on the manufactured oils and fuels used in its agricultural operations for the period from June 18, 1952 to June 18, 1957. The Commissioner granted a refund of 3,415 pesos and 18 centavos, corresponding to the tax paid from January 1, 1956 to June 18, 1957, but denied the claim in the amount of 2,817 pesos and 8 centavos, which corresponded to the tax paid from June 18, 1952 to December 31, 1955, on the ground that the claim was filed after the two-year period provided in Section 306 of the Tax Code had elapsed.

Victorias Milling appealed to the Court of Tax Appeals, contending that Section 306 did not apply to its claim in the light of the ruling in Muller and Phipps (Manila) Limited versus Collector of Internal Revenue. The tax court agreed and, on January 4, 1965, ordered the Commissioner to refund the 2,817 pesos and 8 centavos. The Commissioner then appealed to the Supreme Court. It was not disputed that the oils and fuels were used from June 18, 1952 to December 31, 1955; that the claim for refund was filed on December 23, 1957; and that the appeal to the Court of Tax Appeals was instituted only on February 14, 1962.

Issues

• Whether or not Section 306 of the Tax Code, which prescribes a two-year period for claims of refund of taxes erroneously or illegally collected, applies to a claim for refund of a specific tax that was legally collected.
• Whether or not the taxpayer's claim for refund and its appeal to the Court of Tax Appeals were filed within the two-year prescriptive period.

Applicable Provisions

Section 306 of the Tax Code provides:

SEC. 306. Recovery of tax erroneously or illegally collected. - No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Collector of Internal Revenue; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty.

This is the provision whose two-year period the Court applies to the taxpayer's claim, and whose running the Court reckons from the supervening cause rather than from payment.

Ruling

On the first issue, the Court held that Section 306 applies. The controversy had already been settled in Commissioner of Internal Revenue versus Insular Lumber Company and Court of Tax Appeals, decided on December 11, 1967, on similar facts. The Court there explained that Sections 306 and 309 of the National Internal Revenue Code were intended to govern all kinds of refunds of internal revenue taxes, those imposed and collected pursuant to the Code, and that to hold a claim for refund of a specific tax, an internal revenue tax imposed under Section 142, beyond their scope would thwart that intention. The Court also laid down the reckoning rule:

In fine, when the tax sought to be refunded is illegally or erroneously collected, the period of prescription starts from the date the tax was paid; but when the tax is legally collected, the prescriptive period commences to run from the date of occurrence of the supervening cause which gave rise to the right of refund. The ruling in Muller and Phipps is accordingly modified.

On the second issue, the Court held that the right had prescribed. The claim filed with the Bureau of Internal Revenue on December 23, 1957 was within two years from December 1955, the last month of the period during which the fuels and oils were used. But the appeal to the Court of Tax Appeals was instituted six years and two months from December 31, 1955. The Court stressed that the claim for refund with the Bureau and the subsequent appeal to the Court of Tax Appeals must both be filed within the two-year period, and that if the Commissioner takes time in deciding the claim and the period is about to end, the suit must be started in the Court of Tax Appeals before the end of the two-year period without awaiting the Commissioner's decision.

Doctrine

A Bar candidate should retain these rules. Sections 306 and 309 of the National Internal Revenue Code govern all refunds of internal revenue taxes, including the specific tax on oils and fuels used in agriculture imposed under Section 142; the two-year period is mandatory and is not subject to qualification. When the tax is illegally or erroneously collected, the two-year period runs from the date the tax was paid. When the tax is legally collected, as in this case, the period runs from the date of the supervening cause that gave rise to the right of refund. In either case, both the claim for refund filed with the Commissioner and the appeal to the Court of Tax Appeals must be instituted within the two-year period; the taxpayer may not await the Commissioner's decision at the risk of letting the period lapse.

Disposition

The Supreme Court reversed the decision of the Court of Tax Appeals and dismissed the petition for refund on the ground of prescription, without costs.

Remember This

Memorize the line: when the tax is legally collected, the two-year prescriptive period runs from the supervening cause that gave rise to the right of refund, and both the administrative claim and the appeal to the Court of Tax Appeals must be filed within it. Examiners use this case to test the reckoning of the two-year period under Section 306 and the rule that the taxpayer cannot wait for the Commissioner to act before going to the tax court.