
    S. A. Luz Eléctrica v. The People of Porto Rico.
    Appeal from the District Court of San Juan.
    No. 4.
    Decided June 17, 1903.
    Taxes — -Errors and Frauds Against the Public Revenues — The power to correct errors and prosecute frauds that may have heen committed by taxpayers to the prejudice of the revenues, inheres in all fiscal administrations, the consent of the former fiscal authorities being no bar to such correction and prosecution at any time.
    Id — Sociedades Anónimas — Electric lighting companies known as socieda-des anónimas must be classified as stock companies for the purposes of taxation.
    Companies — Annual Balance Sheets — Companies which do not send in to the Treasury Department certified copies of their annual balance sheets within the fifteen days following the approval of the same, incur the administrative penalty provided for in paragraph 1 of article 145 of the Regulations governing the matter and incur the liability provided for by article 149 of said Regulations.
    Taxes — Stock Companies — In the case of stock, companies taxes must be based upon the total amount of net profits.
    STATEMENT OP THE CASE.
    This is a “litigative-administrative” action between the People of Porto Rico, represented by Emilio del Toro, Assistant Attorney General, and the “Sociedad Anónima de Luz Eléctrica”, represented by Manuel F. Rossy, Esq., pending before us on appeal for reversal of a judgment rendered by the District Court of San Juan, which literally reads as follows:
    “In the City of San Juan, Porto Rico, July 26, 1901. In view of these “litigative-administrative” proceedings instituted by. Manuel F. Rossy, attorney-at-law, representing the stock company known as “Sociedad Anónima de Luz Eléctrica”, doing business in this City, against a decision of the Treasurer of Porto Rico, in regard to the collection of taxes.
    The “Sociedad Anónima de Luz Eléctrica” of this City, had been paying an annual tax of sixty pesos, provincial money, and three jpesos as an additional -charge, the latter being five per cent thereon for collection, the whole being equal to thirty-seven dollars, and eighty cents' United States currency, by reason of its being included under paragraph 58, schedule 2, of the Industrial Tax Regulation, as a house lighting enterprise. On August 16, 1900, the Treasurer of Porto Rico requested said company to produce its balance sheets for the years 1898 and 1899, as approved by the general boards of stock holders, and on August 23, 1900, in view thereof, decided that said company should pay six per cent of its net earnings in accordance with paragraph 3 of schedule 2, and imposed an additional charge for the same proportion of taxes that had been left unpaid, amounting to one thousand and twenty-five dollars, and four cents United States currency, from which were to be deducted the two assessment paid by the company under the previous classification. The company appealed to the Insular Treasury Department under paragraph 3 of article 105 of the Industrial Tax Regulation, and the Treasurer, on the 4th of September of the same year, decided the matter by affirming his decision, and holding that if the company felt itself aggrieved it could apply to the courts for redress, as appears from the record.
    From this decision Manuel F. Rossy, on behalf of Ramón Valdés, president of the aforesaid company, after alleging that the court had jurisdiction to take cognizance of the complaint, maintained that the decision appealed from complied with the requirements set forth in section 1 of the Law of “litiga-tive-administrative ” actions as explained under section 2, the capacity of Valdés having been proved, and the action instituted within the legal period of three months, because the' decision of the Treasury is dated September 4, and the order admitting the “ litigative-administrative ” action was made on the 3rd of October. The complaint is based upon the following facts: That the “Luz Eléctrica” had paid from the year 1893 an annual tax of sixty pesos, under paragraph No. 58, schedule 3, with the consent of the Administration, the latter having acknowledged the receipt of said tax for the years 1898 to 1900; that the Treasurer called for the last two balance sheets of 1898 and 1899, approved by the general board, and from them estimated the tax which he believes the company should pay, namely: for the year 1898, six per cent on the net earnings, which, according to the balance-sheets amounts to four thousand three hundred and twenty-one pesos, and thirty-two centavos; two hundred and fifty-nine pesos, and twenty-eight centavos; five per cent collection fees, twelve pesos and ninety-six centavos; an additional charge for a like unpaid quota, two hundred and fifty-njne pesos and twenty-eight centavos, making a total of five hundred and thirty-one pesos, and fifty two centavos. For the years 1899, six per cent on the net earnings amounting to nine thousand five hundred and sixty-eight pesos and thirteen centavos, five hundred and seventy-four pesos and nine centavos; five per cent collection fee twenty-eight pesos and seventy centavos. An additional charge for a like quota, five hundred and seventy-four pesos and nine centavos; total, one thousand one hundred and seventy-six yiesos, and eighty-eight centavos; thus making a grand total of one thousand seven hundred and eight pesos and forty centavos provincial money, equal to one thousand and twenty-five dollars and four cents, United States currency, from which sum the Treasury deducts the two quotas paid by the plaintiff, the ground for this claim being that paragraph 58, schedule 2, contains a note which reads: “Stock companies engaged in this business shall pay as such (como tales')”, wherefore the claim is made under paragraph 3, schedule B. which reads: “Stock companies shall pay eight per cent of their net earnings” which was afterwards reduced to six per cent; that the plaintiff paid the tax claimed and instituted this action, 'which being admitted, the complaint is perfected; that from the four thousand three hundred and twenty-one pesos, and twenty-two centavos of the balance of 1898, the salaries of the board of directors must be deducted, as also the portion appertaining to the reserve fund, these items not constituting a net profit, the sum distributed being three thousand one hundred and twenty five pesos; and of the balance of 1899, that is to say nine thousand five hundred and seventy-eight pesos, and thirteen centavos; after making these deductions, only seven thousand five hundred pesos were distributed. The legal grounds stated in support of the action being: that payment was formerly made under paragraph 58, schedule 2, letter A; that the Treasurer had in view the note to paragraph 52 in deciding that it should pay as a “Sociedad Anónima” under paragraph 3, letter B., thereby construing the word tales (such) as having reference to stock companies, which is neither grammatical nor legal; that neither is it applicable to the two years, 1898 and 1899, the tax for said years having been collected and accepted by the Administration, the latter is estopped from denying its own acts; that the investigation concerning taxes should be confined to the current year and not extend to the previous years, according to article 105 of the Regulations, and were such investigation permissible it could not extend beyond October 18, 1898, when the American Administratiop' was instituted; that the net earnings calculated by the Administration are not correct, earnings being only such as are divided among share holders; that the additional charge is arbitrarily imposed, according to section 2, article 149, paragraph 1, article 145 and article 105 of the Regulation: wherefore plaintiff prayed that the resolution objected to be set aside and judgment rendered declaring that “Luz Eléctrica” should be taxed only under paragraph 58, schedule 2, for the years 1898 and 1899, and the expired portion of the current year, and should the opinion of the Treasurer prevail, that it be adjudged to pay the new tax beginning only with the present years, said tax to be reckoned on the real net earnings, namely, such as are divided among the share-holders, and costs.
    An order having been made referring the complaint to the Fiscal, he answered that the question depended upon the scope and construction that should be given to the note under paragraph 58, schedule 2, and accepting the facts as stated in the complaint, further stated that upon taking possession of the Island, on October 18, 1898, the United States Government had assumed the obligations of the Insular Treasury, although these had been previous!/ contracted, and in order to meet them it bad proceeded to collect the outstanding taxes, the Treasurer of Porto Rico thus becoming the conti-nuator of the former Treasury. In support of this view he cited, as legal authority, article 4 of the Appropriation Act of 1892; the Regulations for June, 1898, with the schedule thereof; paragraph 58 of said schedule and the note affixed thereto, which is only an exception; the fact of the company’s being included under aforesaid paragraph 58, schedule 2, instead of paragraph 3, letter B., not preventing the Administration from claiming what it is entitled to; the additional charge being a result of the delinquency, according to article 91 of the Regulation. The allegation that the reserve fund is not subject to taxation cannot be sustained, inasmuch as it is provided by law that such sums as have paid taxes, upon being transferred to the reserve fund, shall not be taxed again when divided among share-holders. The Fiscal finally requested that the complaint be dismissed and the Treasurer’s decision affirmed.
    The introduction of evidence being waived by both parties, a day was set for the hearing, which was held on the 26th of July. Judge Juan R. Ramos rendered the opinion of the court as follows:
    “Admitting the fact that the stock company “Luz Eléctrica”, of San Juan, from the time it was constituted in 1893, has been paying an annual tax of sixty pesos, according to paragraph 58, schedule 2, under which it was classified with the consent of the Administration, this annual rate of taxation cannot be altered as regards the past by reason of said consent, besides its having reference to closed budgets, which had been approved without any amendment and annually collected without any proceedings being instituted in due time for a proper investigation.
    The stock company “Luz Eléctrica” having complied with the requirements of article 58 of the Regulation of July 9, 1893, by reporting the class of industry in which it was engaged, it cannot properly be held responsible under article 144 of the Regulation for the periods covered by thq fiscal years 1898-99 and 1899-1900, in view of the provisions of article 157 of said Regulation, because, although entered, it is under a different schedule or class from the one to which it belongs, and exempted by aforesaid article.
    The Treasurer on July 16, 1900, requested the “Luz Eléctrica” to show why the Company should not pay taxes under schedule 2, paragraph 3, section B., modified by article 6 of the appropriation law of 1894-1895, and caused an investigation to be made reaching down to the fiscal year 1900-1901; and in giving his opinion as to the scope of the note to paragraph 58 of the schedule, with respect to the current annual quota, he instituted the investigation according to the requirements' and conditions provided for by the law, so as to have the tax paid in conformity with the intention of said note so far as the current budget is concerned.
    
      For the reasons above set forth, the Treasury should return to said “Luz Eléctrica” Company the sum collected under the two previous budgets, which were definitely closed, it being entitled only to the tax assessed under the corrected classification, for 1900-1901.
    There has been no temerity, since one of the prayers of .the plaintiff has been allowed, the other being overruled, wherefore there should be no special imposition of costs.
    We adjudge that we should declare, and do declare, that the complaint lies as regards the tax assessed on “Luz Eléctrica” for the fiscal years 1898 1899 and 1899-1900 and the additional charge made thereon, but dismiss the same in so far as it relates to the tax apportioned for 1900-1901, plaintiff being required to pay for the latter year as assessed by the Treasury Department, in accordance with the note to paragraph 58 of schedule 2; the Administration to refund to the plaintiff such sums as have been collected on account of the fiscal years 1898-1899 and 1899-1900, without special imposition of costs. Thus by this our judgment, we pronounce, order and sign. Juan R. Ramos, José R. F. Savage, José de Guzmán Benitez.”
    Jesús Romeu y Cobián, Acting Fiscal of the District Court of San Juan, was notified of this judgment and said notification having been declared null and void by this Supreme Court, it was personally served upon the Attorney General of Porto Rico, who appealed therefrom to this Supreme Court. The appeal having been allowed, the record was forwarded to this court, where both parties appeared. The appeal was perfected and a day set for the hearing which took place in due time, Emilio del Toro, Fiscal of this court, representing the Attorney General, as appellant, and Manuel F. Rossy y Calderón, representing the respondent.
    
      Mr. del Toro, Fiscal, for apellant.
    
      Mr. Manuel F. Rossy, for respondent.
   Mb. Chief Justice Quiñones,

after making the above statement of the case, delivered the opinion of the court, as follows:

The findings of fact contained in the judgment appealed from, are accepted.

Among the powers inherent in all fiscal administrations is that of correctiiig errors and prosecuting frauds which may have been committed by tax-payers to the prejudice of the revenues; this power wherewith the head of the Fiscal Administration of Porto Rico was invested by article 98 of the Regulation approved for the assessment, administration and collection of taxes on industry and commerce, of June 9, 1893, authorized the Treasurer of Porto Rico, as chief of the Insular Treasury, to order that the proper investigation be instituted if he had reason to believe that in the classification of the "Luz Eléctrica” Company there had been a mistake or fraud committed to the detriment of the revenues, of the public Treasury.

Although according to the classification provided for in paragraph 58 of schedule 2, accompanying the aforesaid Regulation under letter A. electric lighting enterprises furnishing (¡dectric light to residences, should pay upon the-basis of population an annual tax of sixty dollars in the-cities of San Juan, Ponce and Mayagüez, this notwithstanding, pursuant to the note placed at the end of said paragraph 58 "stock companies thus engaged, should pay-taxes as such”, that is to say, as such stock companies according to the grammatical sense of said note and to the most logical interpretation thereof, for there was no reason why this kind of corporations should be exempt from paying taxes upon the basis o'f their net earnings, as do other stock companies included in paragraph 3 of said schedule 2, letter B. and inasmuch as the stock company “Luz Eléc-trica” had been paying from the time of its establishment down to the years 1898 and 1899, both inclusive, only as an electric light enterprise for the supply of light and not at the rate of six per cent, on its net earnings as a stock company in accordance with the terms of the appropriation law for Porto Rico of 1894 to 1895, there is no doubt that in the classification of said company an error had been committed to the detriment of the interests of the Treasury, which, despite the fact of its having been assented to by’ the previous fiscal Administration was susceptible of correction and amendment, since all errors committed in the scheduling of industrial and commércial enterprises could be corrected at any time, unless upon an inquiry instituted by the Administration a final acquittal of the charge of fraud should have been pronounced, in which event the Administration could not reverse its own decision hut such was not the case in the present instance.

The managers of “Luz Eléctrica” failed to comply with the provision of article 91 of the Regulation which imposed upon them the duty of forwarding to the Department of Taxes and Revenues, certified copies of its balance sheets and annual reports within fifteen days after the approval thereof, and inasmuch as such an omission admits of no justification whatever, since they could not be ignorant of the express provisions of the Regulation governing the assessment, administration and collection of taxes on industrial and commercial enterprises, said managers have been guilty of the administrative offense mentioned in paragraph 1 of article 145 of aforesaid Regulation, and incurred the liability provided for by article 149 thereof, upon which is based the decision of the Treasurer of Porto Rico.

The tax that should be paid by banks and stock companies included under paragraph 3 of schedule 2, letter B., having been fixed upon the basis of the net profits realized by such institutions of credit, there is nd doubt that whatever distribution was to be made of said profits under its by-laws, the tax should be reckoned upon the total amount thereof, and that, therefore, both the dividend which according to the charter of “Luz Eléctrica” should be subtracted from the profits realized, to.be distributed among the members of the Board of Directors for their personal labor, and the amount deducted for the purpose of forming the reserve fund of the association, should be included in the net profits in calculating the tax assessed upon said association, as is confirmed by the provision contained in the last clause of aforesaid paragraph 3, schedule 2, which reads: “Such profits as are deducted from the reserve fund to be distributed among share-holders, that have already-been subjected to taxation, shall not be considered taxable as net profits”, whence it is logically to be inferred that these earnings, upon being paid into the reserve fund and before their distribution, among the share-holders, have in all probability paid their proportion of the tax.

Wherefore, the decision of the Treasurer of Porto Rico, dated August 23, 1900, being in conformity with the provisions of the Regulation that govern the assessment, administration and collection of the tax on- industrial and commercial enterprises, the action prosecuted by “La Luz Eléctrica” against the Administration should be dismissed.

In view of the legal provisions cited, and the judment rendered by the Court of Administrative Litigations, of Madrid, March 3, 1896, we adjudge that we should reverse, and do reverse the judgment appealed from, and dismiss the complaint?filed against the Administration by Ramón Val-dés, acting as representative of the stock company .known as “Luz Eléctrica”, without special imposition of costs.

Justices Hernández, Figueras, Sulzbacher and MacLeary, concurred.  