Declaration & Payment of Dividend - Dividends & Audit, Company Law B Com Notes | EduRev

Company Law

B Com : Declaration & Payment of Dividend - Dividends & Audit, Company Law B Com Notes | EduRev

The document Declaration & Payment of Dividend - Dividends & Audit, Company Law B Com Notes | EduRev is a part of the B Com Course Company Law.
All you need of B Com at this link: B Com

Profits and Ascertainment of Divisible Profits

Maximisation of shareholders wealth is one of the objectives of any business. Dividend in literal terms means the profit of a company which is not retained in the business and is distributed among the shareholders in proportion to the amount paid up on the shares held by them.

'Divisible profits' means the profits which the law allows the company to distribute to the shareholders by way of dividend. According to Palmer's Company Law, the terms 'divisible profits' and 'profits in the legal sense' are synonymous. The profits of a business mean the net proceeds of the concern after deducting the necessary outgoings without which those proceeds could not be earned. [Bharat Insurance Co. Ltd. v. CIT (1931) 1 Com Cases 192, 196 (Lah)].

Meaning of Dividend

The term ‘dividend’ has been defined under Section 2(35) of the Companies Act, 2013. The term “Dividend” includes any interim dividend. It is an inclusive and not an exhaustive definition. According to the generally accepted definition, “dividend” means the profit of a company, which is not retained in the business and is distributed among the shareholders in proportion to the amount paid-up on the shares held by them.

Dividends are usually payable for a financial year after the final accounts are ready and the amount of distributable profits is available. Dividend for a financial year of the company (which is called ‘final dividend’) are payable only if it is declared by the company at its annual general meeting on the recommendation of the Board of directors. Sometimes dividends are also paid by the Board of directors between two annual general meetings without declaring them at an annual general meeting (which is called ‘interim dividend’). The companies having licence under Section 8 of the Act [Formation of companies with charitable objects etc.,] are prohibited by their constitution from paying any dividend to its members. They apply the profits in promoting the objects of the company.

Declaration of Dividend [Section 123]

According to Section 123 (1) of the Act dividend can be paid by a company:

(a) out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2), or

(b) out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or out of both, or

(c) out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government:

Provided that a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company:

Provided further that where, owing to inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the reserves, such declaration of dividend shall not be made except in accordance with such rules as may be prescribed in this behalf:

Provided also that no dividend shall be declared or paid by a company from its reserves other than free reserves.

The above proviso shall not apply to a Government Company in which the entire paid up share capital is held by the Central Government, or by any state government or Governments or by the Central Government and one or more State Governments. [Inserted vide Notification dated 5th June, 2015]

Further stipulations under the rules:

(a) For declaration of dividend out of accumulated profits, the Ministry of Corporate Affairs has provided Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014. Thereby, when there is inadequacy or absence of profits in any year, a company may declare dividend out of free reserves. However, the following conditions shall be fulfilled before declaring dividend out of reserves:

(1) The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the 3 years immediately preceding that year: However, this rule will not apply if a company has not declared any dividend in each of the three preceding financial year.

(2) The total amount to be drawn from such accumulated profits shall not exceed one tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement. Therefore, the total amount that can be drawn from the accumulated profits is Less than or equal to 1/10th of the Paid up share capital and free reserves. The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared.

(3) The balance of reserves after such withdrawal shall not fall below 15% of its paid up share capital as appearing in the latest audited financial statement.

[Note: “No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company of the current year, inserted by the Companies (Declaration and Payment of Dividend) Amendment Rules, 2014” has been deleted vide Notification no. GSR 441(E) dated 29th May 2015.]

Depositing of amount of dividend

In terms of section 123(4), the amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.

This sub- section shall not apply to a Government Company in which the entire paid up share capital is held by the Central Government, or by any state government or Governments or by the Central Government and one or more State Governments.

Interim Dividend

According to section 2(35), 'dividend' includes any interim dividend. According to section 123(3), the Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared.

However, in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.

The Board of directors may declare interim dividend and the amount of dividend including interim dividend shall be deposited in a separate bank account within five days from the date of declaration of such dividend.

Payment of dividend [123(5]

According to Section 123 (5) of the Act:

(a) Dividends are payable in cash. Dividends that are payable to the shareholder in cash may be paid by cheque or warrant or in any electronic mode.

(b) Dividend shall be payable only to the registered shareholder of the share or to his order or to his banker.

(c) Nothing in sub-section 5 of section 123, shall prohibit the capitalization of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company.

Punishment for failure to distribute dividends (Section 127)

Section 127 of the Companies Act, 2013 came into force on 12th September, 2013 which provides for punishment for failure to distribute dividend on time. According to this section:

(a) Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to two years.

(b) He shall also be liable for a fine which shall not be less than ` 1,000 rupees for every day during which such default continues.

(c) The company shall also be liable to pay simple interest at the rate of 18% p.a. during the period for which such default continues.

(d) However, the following are the exceptions under which no offence shall be deemed to have been committed:

(1) where the dividend could not be paid by reason of the operation of any law.

(2) where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him.

(3) where there is a dispute regarding the right to receive the dividend.

(4) where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder, or

(5) where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.

 

Revocation of declared dividend:

Ordinarily, a dividend once declared at Annual General Meeting, cannot be revoked, except, with the consent of the shareholders, for a declaration of dividend creates a debt to the shareholders in whose favour it is declared.

If a dividend is declared and the amount is paid or credited to the shareholders as dividend, the character of the credit or payment as dividend cannot be altered by a subsequent resolution. [Kishanchand Chellaram v CIT (1962) 32 Comp Cas 1046,1050 (SC)].

Offer running on EduRev: Apply code STAYHOME200 to get INR 200 off on our premium plan EduRev Infinity!

Dynamic Test

Content Category

Related Searches

Summary

,

Declaration & Payment of Dividend - Dividends & Audit

,

past year papers

,

Free

,

Declaration & Payment of Dividend - Dividends & Audit

,

ppt

,

mock tests for examination

,

Previous Year Questions with Solutions

,

video lectures

,

Important questions

,

Extra Questions

,

Declaration & Payment of Dividend - Dividends & Audit

,

Viva Questions

,

Sample Paper

,

Company Law B Com Notes | EduRev

,

Exam

,

study material

,

Company Law B Com Notes | EduRev

,

Objective type Questions

,

Company Law B Com Notes | EduRev

,

pdf

,

MCQs

,

practice quizzes

,

Semester Notes

,

shortcuts and tricks

;