CENTRAL AZUCARERA DON PEDRO, PETITIONER, VS. COURT OF TAX APPEALS, AND COMMISSIONER OF INTERNAL REVENUE, RESPONDENTS.

Central Azucarera Don Pedro versus Court of Tax Appeals

The Case

This is a consolidated appeal by Central Azucarera Don Pedro, a domestic corporation, against the Court of Tax Appeals and the Commissioner of Internal Revenue. The petitioner challenges the imposition of six per centum per annum interest, that is one half per centum monthly, on deficiency income taxes for income earned before the effectivity of Republic Act No. 2343 but assessed after it. The case matters because it fixes the rule on the retroactive operation of the amended interest provision on deficiency income tax, and it teaches the bar candidate that interest on a deficiency is compensatory and not penal.

Procedural History

The Commissioner assessed deficiency income taxes against the petitioner. The petitioner paid the deficiency tax proper but protested the interest, and the Commissioner sustained the interest. The petitioner then filed a petition for review in the Court of Tax Appeals. In the first case, the Tax Court rendered its decision on June 15, 1964, upholding the Commissioner. In the second case, involving a claim for refund of interest already paid, the Tax Court rendered its decision on June 29, 1964, likewise sustaining the Commissioner. The petitioner appealed both decisions to the Supreme Court, which, upon motion of the Solicitor General, allowed a consolidated brief and considered the two appeals jointly.

Facts

Central Azucarera Don Pedro filed its income tax returns on a fiscal year basis ending August 31 of every year. For the fiscal year ending August 31, 1954, it filed its return on October 24, 1954 and paid the income tax computed on that return. On October 15, 1959, the Commissioner assessed a deficiency income tax for that year, without imposing any interest. The petitioner protested, and in a letter dated December 20, 1961, the Commissioner made a revised assessment of ten thousand sixty two pesos as deficiency income tax, adding one thousand five hundred nine pesos and thirty centavos as one half per centum monthly interest computed from June 20, 1959 to December 20, 1961. The petitioner paid the deficiency tax proper on January 16, 1962 but objected to the interest, and the Commissioner maintained the interest in a letter dated September 22, 1962.

For the succeeding fiscal years ending August 31, 1955, 1956, 1957, and 1958, the petitioner filed its returns and paid the corresponding income taxes within the prescribed period. After examination, the Commissioner assessed deficiency income taxes totaling twenty one thousand three hundred thirty pesos, plus interest totaling two thousand three hundred seven pesos and ten centavos, imposed under the same amended provision. The petitioner paid both the deficiency taxes and the interest, then filed a claim for refund of the interest, and when the Commissioner failed to act and the two year prescriptive period was about to expire, it filed a petition for review in the Court of Tax Appeals.

It is undisputed that the taxable incomes were earned before, but were assessed after, the effectivity on June 20, 1959 of Republic Act No. 2343, and that the deficiency assessments arose from erroneous but not fraudulent or false returns. The Commissioner computed the interest only from June 20, 1959, the date of effectivity of the amendatory law.

Issues

• Whether or not the six per centum per annum interest on deficiency income tax under Section 51(d) of the National Internal Revenue Code, as amended by Republic Act No. 2343, is imposable on deficiency income tax due on income earned before the effectivity of that law but assessed after it.
• Whether or not the imposition of such interest amounts to a retroactive application of Republic Act No. 2343, or violates the constitutional prohibition against ex post facto laws.
• Whether or not Section 13 of Republic Act No. 2343 limits the application of the interest provision to income earned after the effectivity of the law.

Applicable Provisions

Section 51(d) of the National Internal Revenue Code, as amended by Republic Act No. 2343, provides:

Interest upon the amount determined as a deficiency shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Commissioner of Internal Revenue; and shall be collected as a part of the tax, at the rate of six per centum per annum from the date prescribed for the payment of the tax (or, if the tax is paid in installments, from the date prescribed for the payment of the first installment) to the date the deficiency is assessed: Provided, That the maximum amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three years, the present provisions regarding prescription to the contrary notwithstanding.

This is the provision under which the Commissioner imposed the interest, and its terms govern whether the interest may be collected on deficiencies assessed after its effectivity.

Section 13 of Republic Act No. 2343 provides:

This Act shall take effect upon its approval: Provided, That the rate hereinabove stipulated shall apply to income received from January first, nineteen hundred and fifty-nine, and for the fiscal periods ending after June thirty, nineteen hundred and fifty-nine.

This provision fixes the effectivity of the law and the reach of the new basic tax rates, and the petitioner invoked it to argue that the interest should apply only to income earned after the law took effect.

Ruling

On the first issue, the Court held that the interest is imposable. Under the old Section 51(e), interest on a deficiency ran from the time the tax became due, while under the new Section 51(d), interest runs from the date prescribed for the payment of the tax to the date the deficiency is assessed. The Court explained that the interest was imposable in case of non payment on time, not only on the basic income tax but also on the deficiency tax, since the deficiency was part and parcel of the petitioner's income tax liability.

On the second issue, the Court held that there was no retroactive application. The new Section 51(d) expressly provides that the interest on deficiency shall be assessed at the same time as the deficiency, and the Commissioner imposed the interest only from June 20, 1959, the date of effectivity of the amendatory law, while the deficiency taxes in question were assessed and unpaid when the law was already in force. The Court added that the application of the amended provision worked in favor of the petitioner, since instead of the one per centum monthly interest under the old law running from the time the tax became due, the Commissioner imposed only the new one half per centum monthly interest from June 20, 1959, which was less than what would be due under the old law. On the constitutional objection, the Court held that the prohibition against ex post facto laws applies only to criminal or penal matters, and that the interest here is not penal but compensatory, being just compensation to the State for the delay in paying the tax and for the concomitant use by the taxpayer of funds that rightfully should be in the government's hands.

On the third issue, the Court held that Section 13 of Republic Act No. 2343 refers only to the basic tax rates, which are made applicable to income received in 1959 onward, and does not affect the interest due on deficiencies, which are left to be governed by Section 51(d).

Doctrine

Interest on a deficiency income tax under Section 51(d) of the National Internal Revenue Code, as amended, may be imposed on a deficiency assessed after the effectivity of Republic Act No. 2343 even if the income was earned before that date, provided the interest is computed only from the date of effectivity of the amendatory law. Such imposition is not a retroactive application of the law, because the deficiency was assessed and remained unpaid when the law was already in force.

Interest on a tax deficiency is compensatory and not penal. It is just compensation to the State for the delay in payment and for the taxpayer's use of funds that rightfully belong to the government. Being civil in nature, it does not fall within the prohibition against ex post facto laws, which applies only to criminal or penal matters.

Section 13 of Republic Act No. 2343 governs only the basic tax rates and does not limit the application of the interest provision on deficiencies under Section 51(d).

Disposition

The Supreme Court affirmed both decisions of the Court of Tax Appeals, with costs against Central Azucarera Don Pedro in both instances.

Remember This

The one line to memorize: interest on a tax deficiency is compensatory, not penal, and may be computed from the effectivity of the amendatory law on deficiencies assessed after it, without any retroactive application. Examiners use this case to test the nature of deficiency interest and the rule that the prohibition against ex post facto laws does not reach civil tax measures.