Lim, Sr. vs. Court of Appeals, 190 SCRA 616, G.R. Nos. 48134-37.

October 18, 1990

Fernan, J.
Facts:
On October 5, 1959, a raid was conducted at their business address by the
National Bureau of Investigation by virtue of a search warrant issued by Judge
Wenceslao L. Cornejo of the City Court of Manila. A similar raid was made on
petitioners' premises at 111 12th Street, Quezon City. Seized from the Lim
couple were business and accounting records which served as bases for an
investigation undertaken by the Bureau of Internal Revenue (BIR).

On September 30, 1964 Senior Revenue Examiner Raphael S. Daet submitted a

memorandum with the findings that the income tax returns filed by petitioners for
the years 1958 and 1959 were false or fraudulent. Daet recommended that an
assessment of P835,127.00 be made against the petitioners.

Accordingly, on April 7, 1965, then Acting Commissioner of the BIR, Benjamin M.

Tabios informed petitioners that there was due from them the amount of
P922,913.04 as deficiency income taxes for 1958 and 1959, giving them until
May 7, 1965 to pay the amount.

On April 10, 1965, petitioner Emilio E. Lim, Sr., requested for a reinvestigation.
The BIR expressed willingness to grant such request but on condition that within
ten days from notice, Lim would accomplish a waiver of defense of prescription
under the Statute of Limitations and that one half of the deficiency income tax
would be deposited with the BIR and the other half secured by a surety bond. If
within the ten-day period the BIR did not hear from petitioners, then it would be
presumed that the request for reinvestigation had been abandoned. Petitioner
Emilio E. Lim, Sr. refused to comply with the above conditions and reiterated his
request for another investigation.

On October 10, 1967, the BIR rendered a final decision holding that there was no
cause for reversal of the assessment against the Lim couple. Petitioners were
required to pay deficiency income taxes for 1958 and 1959 amounting to
P1,237,190.55 inclusive of interest, surcharges and compromise penalty for late
payment. The final notice and demand for payment was served on petitioners
through their daughter-in-law on July 3, 1968.

Still, no payment was forthcoming from the delinquent taxpayers. Accordingly on

September 1, 1969, the matter was referred by the BIR to the Manila Fiscal's
Office for investigation and prosecution. On June 23, 1970, four (4) separate
criminal informations were filed against petitioners in the then Court of First
Instance of Manila, Branch VI for violation of Sections 45 and 51 in relation to
Section 73 of the National Internal Revenue Code. 2 Trial ensued. On August 19,
1975, the trial court rendered two (2) joint decisions finding petitioners guilty as
charged. Hence the present petition for review by certiorari.

In their Brief, petitioners contend that the Appellate Court erred in holding that the
offenses charged in Criminal Case Nos. 1790 and 1791 prescribed in ten (10)
years, instead of five (5) years; that the prescriptive period in Criminal Cases
Nos. 1788 and 1789 commenced to run only from July 3, 1968, the date of the
final assessment; that Section 316 of the Tax Code as amended by Presidential
Decree No. 69 was applicable to the case at bar; and that the civil obligation of
petitioner Emilio E. Lim, Sr. arising from the crimes charged was not extinguished
by his death.

Issue:

When is the reckoning date of the five year period for filing a criminal charges
against the petitioner?

Held:

We hold for the Government. Section 51 (b) of the Tax Code provides:

(b) Assessment and payment of deficiency tax. — After the return is

filed, the Commissioner of internal Revenue shall examine it and
assess the correct amount of the tax. The tax or deficiency in tax so
discovered shall be paid upon notice and demand from the
Commissioner of Internal Revenue. (Emphasis supplied)

Inasmuch as the final notice and demand for payment of the deficiency taxes
was served on petitioners on July 3, 1968, it was only then that the cause of
action on the part of the BIR accrued. This is so because prior to the receipt of
the letter-assessment, no violation has yet been committed by the taxpayers. The
offense was committed only after receipt was coupled with the wilful refusal to
pay the taxes due within the alloted period. The two criminal informations, having
been filed on June 23, 1970, are well-within the five-year prescriptive period and
are not time-barred.

With regard to Criminal Cases Nos. 1790 and 1791 which dealt with petitioners'
filing of fraudulent consolidated income tax returns with intent to evade the
assessment decreed by law, petitioners contend that the said crimes have
likewise prescribed. They advance the view that the five-year period should be
counted from the date of discovery of the alleged fraud which, at the latest,
should have been October 15, 1964, the date stated by the Appellate Court in its
resolution of April 4, 1978 as the date the fraudulent nature of the returns was
unearthed. 9

On behalf of the Government, the Solicitor General counters that the crime of
filing false returns can be considered "discovered" only after the manner of
commission, and the nature and extent of the fraud have been definitely
ascertained. It was only on October 10, 1967 when the BIR rendered its final
decision holding that there was no ground for the reversal of the assessment and
therefore required the petitioners to pay P1,237,190.55 in deficiency taxes that
the tax infractions were discovered.

Not only that. The Solicitor General stresses that Section 354 speaks not only of
discovery of the fraud but also institution of judicial proceedings. Note the
conjunctive word "and" between the phrases "the discovery thereof" and "the
institution of judicial proceedings for its investigation and proceedings." In other
words, in addition to the fact of discovery, there must be a judicial proceeding for
the investigation and punishment of the tax offense before the five-year limiting
period begins to run. It was on September 1, 1969 that the offenses subject of
Criminal Cases Nos. 1790 and 1791 were indorsed to the Fiscal's Office for
preliminary investigation. Inasmuch as a preliminary investigation is a proceeding
for investigation and punishment of a crime, it was only on September 1, 1969
that the prescriptive period commenced.

The Court is inclined to adopt the view of the Solicitor General. For while that
particular point might have been raised in the Ching Lak case, the Court, at that
time, did not give a definitive ruling which would have settled the question once
and for all. As Section 354 stands in the statute book (and to this day it has
remained unchanged) it would indeed seem that tax cases, such as the present
ones, are practically imprescriptible for as long as the period from the
discovery and institution of judicial proceedings for its investigation and
punishment, up to the filing of the information in court does not exceed five (5)
years.

GUTTIERREZ, JR., J., concurring

I concur in the results.

I feel that certain issues need further clarification. I, therefore, reserve my

definitive vote on these issues. For instance, to say that no violation of the
Income Tax Law has been committed until after receipt of the letter assessment
overlooks the fact that the assessment is only evidence of a prior violation. It is
not the refusal to comply with the latter that creates the violation. It is the failure
to pay taxes in the years that they were due. Again, to make discovery of the
fraud and institution of judicial proceedings conjunctive seems to me illogical
because the judicial proceedings always come after discovery. The date of
discovery becomes meaningless under our decision. Perhaps, the law needs
amendment to make it clearer.

Add notes:

The petition, however, is impressed with merit insofar as it assails the inclusion in
the judgment of the payment of deficiency taxes in Criminal Cases Nos. 1788-
1789. The trial court had absolutely no jurisdiction in sentencing the Lim couple
to indemnify the Government for the taxes unpaid. The lower court erred in
applying Presidential Decree No. 69, particularly Section 316 thereof, which
provides that "judgment in the criminal case shall not only impose the penalty but
shall order payment of the taxes subject of the criminal case", because that
decree took effect only on January 1, 1973 whereas the criminal cases subject of
this appeal were instituted on June 23, 1970. Save in the two specific instances,
Presidential Decree No. 69 has no retroactive application.

CASE SYLLABI:

Taxation; Income Tax; Prescription; The 5-year prescriptive period

provided for under Sec. 354 of the Tax Code should be reckoned from the
date the final notice and demand was served on the taxpayer.—Relative to
Criminal Cases Nos. 1788 and 1789 which involved petitioners' refusal to pay the
deficiency income taxes due, again both parties are in accord that by their
nature, the violations as charged could only be committed after service of notice
and demand for payment of the deficiency taxes upon the taxpayers. Petitioners
maintain that the five-year period of limitation under Section 354 should be
reckoned from April 7, 1965, the date of the original assessment while the
Government insists that it should be counted from July 3, 1968 when the final
notice and demand was served on petitioners' daughter-in-law. We hold for the
Government. Section 51 (b) of the Tax Code provides: "(b) Assessment and
payment of deficiency tax.—After the return is filed, the Commissioner of Internal
Revenue shall examine it and assess the correct amount of the tax. The tax or
deficiency in tax so discovered shall be paid upon notice and demand from the
Commissioner of lnternal Revenue." (Italics supplied) Inasmuch as the final
notice and demand for payment of the deficiency taxes was served on petitioners
on July 3, 1968, it was only then that the cause of action on the part of the BIR
accrued. This is so because prior to the receipt of the letter-assessment, no
violation has yet been committed by the taxpayers. The offense was committed
only after receipt was coupled with the wilful refusal to pay the taxes due within
the alloted period. The two criminal informations, having been filed on June 23,
1970, are well-within the five-year prescriptive period and are not time-barred.
Same; Same; Same; Fraudulent Returns; In addition to the fact of
discovery, there must be a judicial proceeding for the investigation and
punishment of the tax offense before the five-year limiting period begins to
run.—On behalf of the Government, the Solicitor General counters that the crime
of filing false returns can be considered "discovered" only after the manner of
commission, and the nature and extent of the fraud have been definitely
ascertained. It was only on October 10, 1967 when the BIR rendered its final
decision holding that there was no ground for the reversal of the assessment and
therefore required the petitioners to pay P1,237,190.55 in deficiency taxes that
the tax infractions were discovered. Not only that. The Solicitor General stresses
that Section 354 speaks not only of discovery of the fraud but also institution of
judicial proceedings. Note the conjunctive word "and" between the phrases "the
discovery thereof' and "the institution of judicial proceedings for its investigation
and proceedings." In other words, in addition to the fact of discovery, there must
be a judicial proceeding for the investigation and punishment of the tax offense
before the five-year limiting period begins to run. It was on September 1,1969
that the offenses subject of Criminal Cases Nos. 1790 and 1791 were indorsed to
the Fiscal's Office for preliminary investigation. Inasmuch as a preliminary
investigation is a proceeding for investigation and punishment of a crime, it was
only on September 1,1969 that the prescriptive period commenced. x x x The
Court is inclined to adopt the view of the Solicitor General. For while that
particular point might have been raised in the Ching Lak case, the Court, at that
time, did not give a definitive ruling which would have settled the question once
and for all. As Section 354 stands in the statute book (and to this day it has
remained unchanged) it would indeed seem that the tax cases, such as the
present ones, are practically imprescriptible for as long as the period from the
discovery and institution of judicial proceedings for its investigation and
punishment, up to the filing of the information in court does not exceed five (5)
years.