Divisible profitDivisible profit

By By

Prof. L.Augustin AmaladasProf. L.Augustin Amaladas

M.com.,AICWA.,B.Ed.,PGDFMM.com.,AICWA.,B.Ed.,PGDFM

coveragecoverage Meaning of profitMeaning of profit Types of profitTypes of profit Divisible profit-meaningDivisible profit-meaning Reserve and provisionReserve and provision Capital profit and revenue profitsCapital profit and revenue profits Types of revenue profitTypes of revenue profit Types of capital profitTypes of capital profit Types of dividendTypes of dividend Bonus sharesBonus shares Redemption of preference sharesRedemption of preference shares Buyback of sharesBuyback of shares

ContinuationContinuation Statutory reservesStatutory reserves How to use reserve for dividend-How to use reserve for dividend-

restrictionsrestrictions Income tax point of viewIncome tax point of view TDSTDS Procedure of declaration of dividendProcedure of declaration of dividend Unpaid dividendUnpaid dividend Investors Education and protection fundInvestors Education and protection fund Interim dividendInterim dividend Final dividendFinal dividend

Meaning of profitMeaning of profit

Revenue-CostRevenue-Cost Asset-liabilities and capitalAsset-liabilities and capital Income – expenditureIncome – expenditure Meaning of incomeMeaning of income Meaning of expenditureMeaning of expenditure Capital exp VS revenue expenditureCapital exp VS revenue expenditure Capital income VS Revenue incomeCapital income VS Revenue income

Types of profitTypes of profit Gross profitGross profit Net profitNet profit Profit before taxProfit before tax Operating profitOperating profit Non operating profitNon operating profit Profit before Interest and dividend(PBIT)Profit before Interest and dividend(PBIT) Profit after interest and TAx(PAIT)Profit after interest and TAx(PAIT) Capital profitCapital profit Revenue profitRevenue profit Profit after depreciationProfit after depreciation

Divisible profit-meaningDivisible profit-meaning

Profit after adequate Profit after adequate depreciation[Sec.205(2)]depreciation[Sec.205(2)]

Profit after interest-depreciation of Profit after interest-depreciation of the current year- Depreciation of the the current year- Depreciation of the previous year- loss of the previous previous year- loss of the previous yearyear

Depreciation as per Schedule XIV of Depreciation as per Schedule XIV of the Companies Actthe Companies Act

Section 350 –calculated on WDVSection 350 –calculated on WDV

DepreciationDepreciationDepreciationDepreciation

Accounting Standard-06Accounting Standard-06 Depreciation on Fixed assetsDepreciation on Fixed assets Depreciation on circulating asset is Depreciation on circulating asset is

compulsory ie Cost or market price compulsory ie Cost or market price whichever is lower.whichever is lower.

Calculation of DividendCalculation of Dividend

On paid up capital in the absence of On paid up capital in the absence of any indication to the contrary in the any indication to the contrary in the AOAAOA

Preference share holders should be Preference share holders should be paid first.paid first.

Interim dividendInterim dividend Section 2(14A) of companies Act defines Section 2(14A) of companies Act defines

dividend to include interim dividenddividend to include interim dividend Regulation 85 of Table ARegulation 85 of Table A The rules applicable to final dividend is also The rules applicable to final dividend is also

applicable[205(1A)]applicable[205(1A)]

Directors declare dividendDirectors declare dividend Amount to be deposited to a separate account Amount to be deposited to a separate account

once dividend declared with in 5 days from the once dividend declared with in 5 days from the date of declaration of dividenddate of declaration of dividend

All the provisions sections 205(1), 205A, 205C,All the provisions sections 205(1), 205A, 205C, 206, 206A 207 shall be applicable.206, 206A 207 shall be applicable.

Final dividendFinal dividend

Rate-Recommendation made by BODRate-Recommendation made by BOD Declared by Shareholders in the Declared by Shareholders in the

shareholders’ meetingshareholders’ meeting Arrears of dividend to preference Arrears of dividend to preference

shareholders is treated as contingent shareholders is treated as contingent liability.liability.

Right to receive dividend happens Right to receive dividend happens only when declared by the only when declared by the shareholders in the general meeting.shareholders in the general meeting.

Final dividend-continueFinal dividend-continue

Dividend can be declared even in the Dividend can be declared even in the subsequent extra ordinary meeting.subsequent extra ordinary meeting.

Court will not interfere with respect Court will not interfere with respect to the quantum of dividend. It is the to the quantum of dividend. It is the internal matter of the directors to internal matter of the directors to decide the rate and shareholders decide the rate and shareholders approve it.approve it.

Legal provisions Legal provisions

1. Resolution in 1. Resolution in the General the General meeting:meeting:

Shareholders Shareholders themselves can themselves can not declared not declared dividenddividend

217 indicates that 217 indicates that the directors are the directors are required to state in required to state in their report the their report the amount which they amount which they recommend.recommend.

2. Dividend in proportion to paid up2. Dividend in proportion to paid up(Section 93) (Section 93)

If authorised by articles- on paid up If authorised by articles- on paid up share capitalshare capital

If not authorised – on nominal valueIf not authorised – on nominal value Case law:- Oak bank oil co.VS CrumCase law:- Oak bank oil co.VS Crum

3.Dividend out of profits3.Dividend out of profits

Sec.205(2)-The current revenue profit Sec.205(2)-The current revenue profit after depreciationafter depreciation

Section 205(1)-Profits of the previous yearSection 205(1)-Profits of the previous year Out of bothOut of both Money provided by the Central Money provided by the Central

government if guarantee givengovernment if guarantee given #dividend can be declared if permitted by #dividend can be declared if permitted by

Central Government without providing Central Government without providing depreciation.depreciation.

The Cardinal principleThe Cardinal principle

Dividend can be declared out of Dividend can be declared out of profits otherwise amount to a breach profits otherwise amount to a breach of trust.of trust.

If paid without profit Directors are If paid without profit Directors are joint and severally liable.joint and severally liable.

Case law:Exchange banking Case law:Exchange banking Company Flitoroft -debt becomes Company Flitoroft -debt becomes bad shown as asset without bad shown as asset without deducting bad debt from profit.deducting bad debt from profit.

4. Dividend includes interim 4. Dividend includes interim dividenddividend

Section 2(14A) of companies Act defines Section 2(14A) of companies Act defines dividend to include interim dividenddividend to include interim dividend

Regulation 85 of Table ARegulation 85 of Table A The rules applicable to final dividend is also The rules applicable to final dividend is also

applicable[205(1A)]applicable[205(1A)]

Directors declare dividendDirectors declare dividend Amount to be deposited to a separate account Amount to be deposited to a separate account

once dividend declared with in 5 days from the once dividend declared with in 5 days from the date of declaration of dividenddate of declaration of dividend

All the provisions sections 205(1), 205A, 205C,All the provisions sections 205(1), 205A, 205C, 206, 206A 207 shall be applicable.206, 206A 207 shall be applicable.

5.Transfer to reserve5.Transfer to reserve

Section 205(2A)-upto 10%Section 205(2A)-upto 10%

Rate of dividendRate of dividend % of profit to % of profit to reservereserve

10%-12.5%10%-12.5% 2.5%2.5% 12.5%-15%12.5%-15% 5.0% 5.0% 15%-20%15%-20% 7.5%7.5% 20% and above20% and above 10%10%

6. Dividend out reserves6. Dividend out reserves

Section 205-A(3)-comply with rules Section 205-A(3)-comply with rules framed by Central Government.framed by Central Government.

7.Dividend payable only in cash7.Dividend payable only in cash

Section 205(3)-Cash or cheque or Section 205(3)-Cash or cheque or dividend Warrantdividend Warrant

Posted to the registered address of Posted to the registered address of the shareholders.the shareholders.

Joint holders-to the first name on the Joint holders-to the first name on the register.register.

8.Compliance with provisions of 8.Compliance with provisions of Section 80-ASection 80-A

It is related to redemption of It is related to redemption of irredeemable preference sharesirredeemable preference shares

If such shares are not redeemed it If such shares are not redeemed it can not declare dividendcan not declare dividend

9.Unpaid dividend9.Unpaid dividend

Section 205A(1)If dividend not paid /not Section 205A(1)If dividend not paid /not claimed within 30 days It should be claimed within 30 days It should be transferred to the unpaid dividend account transferred to the unpaid dividend account within 7 days after the expiry of 30 days within 7 days after the expiry of 30 days from the date of declaration of dividend.from the date of declaration of dividend.

Penalty:Sec.205A(4):1. Penalty to directorsPenalty:Sec.205A(4):1. Penalty to directors 2. 12% interest per annum to such 2. 12% interest per annum to such

members payable by the companymembers payable by the company

10.Transfer to investor Education 10.Transfer to investor Education and protection fundand protection fund

Sec.205A(5): After 7 years from the Sec.205A(5): After 7 years from the date of transfer to unclaimed date of transfer to unclaimed accountaccount

11.Receipt from Central 11.Receipt from Central government for transfergovernment for transfer

Receipt has to be obtainedReceipt has to be obtained Penalty: Sec.205A(8):Rs.5000 for Penalty: Sec.205A(8):Rs.5000 for

every day of default.every day of default.

12.Claim from IEPF12.Claim from IEPF

No claim is allowed[Sec.205C]No claim is allowed[Sec.205C]

13. Payment of dividend to 13. Payment of dividend to registered shareholderregistered shareholder

To the registered To the registered shareholder/order/his bankershareholder/order/his banker

Shareholder can give direction to pay Shareholder can give direction to pay to the banker[Sec.206]to the banker[Sec.206]

14.Right to dividend, right shares 14.Right to dividend, right shares and bonus sharesand bonus shares

To the transferee if mandate given bt To the transferee if mandate given bt transferortransferor

In the absence of such mandate by In the absence of such mandate by transferor company has to transfer to transferor company has to transfer to unpaid dividend account and keep unpaid dividend account and keep abayance till the title to shares abayance till the title to shares decided.decided.

15.Penalty15.Penalty

Sec.207 : if not paid within 30 daysSec.207 : if not paid within 30 days Every director-imprisonment upto-3 Every director-imprisonment upto-3

yearsyears Fine to directors: -1000 per day of Fine to directors: -1000 per day of

defaultdefault The company has to pay Simple The company has to pay Simple

interest-18%pa during such default. interest-18%pa during such default.

Special circumstances to pay Special circumstances to pay dividend within 42 daysdividend within 42 days

A) By reason of operation of lawA) By reason of operation of law B) the direction of share holders B) the direction of share holders

cannot be complied withcannot be complied with C) dispute to receive dividendC) dispute to receive dividend d) adjust dividend with claims with d) adjust dividend with claims with

shareholdershareholder E) not a fault of the companyE) not a fault of the company

Investors Education and protection Investors Education and protection fund(205C)fund(205C)

It is applicable to interim dividendIt is applicable to interim dividend It consists of:It consists of: Unpaid dividendUnpaid dividend The application money received for allotment of The application money received for allotment of

securitiessecurities Matured deposits with companiesMatured deposits with companies Matured debentures with companiesMatured debentures with companies Interest accrued to the accountInterest accrued to the account Grants and donation to the fundGrants and donation to the fund Interest received on investments madeInterest received on investments made

Income taxIncome tax

Dividend received by the assessee from domestic company Dividend received by the assessee from domestic company is exempted u/s 10(34)/(35)is exempted u/s 10(34)/(35)

The payer company has to pay 12.5% as tax.The payer company has to pay 12.5% as tax. Dividend received fromforeign company is taxedDividend received fromforeign company is taxed Dividend includes 2(22) of Income tax Act :Dividend includes 2(22) of Income tax Act :

-RELEASE OF COMPANY ASSET FOR DISTRIBUTION -RELEASE OF COMPANY ASSET FOR DISTRIBUTION TO SHARE HOLDERS TO SHARE HOLDERS to the extent of divisible profitsto the extent of divisible profits

-Distribution of debenture stock, deposit certificates -Distribution of debenture stock, deposit certificates and bonus to preference shareholdersand bonus to preference shareholders

-distribution on liquidation of company-distribution on liquidation of company-distribution in reduction of capital-distribution in reduction of capital-any payment by way of loan or advance by closely -any payment by way of loan or advance by closely

held company to shareholders.held company to shareholders.

TDS if dividend declared and paid out side indiaTDS if dividend declared and paid out side india

Income taxIncome tax Dividend includes 2(22) of Income tax Act :Dividend includes 2(22) of Income tax Act :

-RELEASE OF COMPANY ASSET FOR DISTRIBUTION -RELEASE OF COMPANY ASSET FOR DISTRIBUTION TO SHARE HOLDERS TO SHARE HOLDERS to the extent of divisible profitsto the extent of divisible profits

-Distribution of debenture stock, deposit certificates -Distribution of debenture stock, deposit certificates and bonus to preference shareholdersand bonus to preference shareholders

-distribution on liquidation of company-distribution on liquidation of company

-distribution in reduction of capital-distribution in reduction of capital

-any payment by way of loan or advance by closely -any payment by way of loan or advance by closely held company to shareholders.held company to shareholders.

TDS if dividend declared and paid out side indiaTDS if dividend declared and paid out side india

Income taxIncome tax

Dividend excludes:Dividend excludes: Buy back of shares(77A of companies Buy back of shares(77A of companies

Act)Act) Distribution of shares in the scheme Distribution of shares in the scheme

of amalgamation, demerger in of amalgamation, demerger in accordance with section 2(1B) of IT accordance with section 2(1B) of IT act.act.

Capital profitsCapital profits

Profit on sale of assetProfit on sale of asset Profit on revaluation of assetProfit on revaluation of asset Share premiumShare premium Profit on forfeitureProfit on forfeiture Profits prior to incorporationProfits prior to incorporation Profit on redemption on DebenturesProfit on redemption on Debentures Capital redemption reserve accountCapital redemption reserve account

Transfer to reserveTransfer to reserve

Rate of dividend % of profit toRate of dividend % of profit to reservereserve

10%-12.5%10%-12.5% 2.5%2.5% 12.5%-15%12.5%-15% 5.0% 5.0% 15%-20%15%-20% 7.5%7.5% 20% and above20% and above 10%10%

Dividend out of reserveDividend out of reserve

Sec 205(A)Sec 205(A) Rate should not exceed five years Rate should not exceed five years

average rate of dividendaverage rate of dividend Drawn from reserve should not be Drawn from reserve should not be

more than 1/10 of paid up capitalmore than 1/10 of paid up capital The reserve withdrawn to be used for The reserve withdrawn to be used for

set off lossesset off losses Balance of reserve =15% of paid up Balance of reserve =15% of paid up

capitalcapital

QuestionsQuestions

What is meant by dividend?What is meant by dividend? Distinguish between dividend and interest.Distinguish between dividend and interest. When does a right to claim dividend arise?When does a right to claim dividend arise? Can dividend be declared in an extraordinary Can dividend be declared in an extraordinary

meeting?meeting? Can interim dividend declared revoked?Can interim dividend declared revoked? Who declares the rate of dividend?Who declares the rate of dividend? Can you declare dividend out of reserves?Can you declare dividend out of reserves? Can dividend declared and paid other than cash?Can dividend declared and paid other than cash? What is time limit for payment of dividend?What is time limit for payment of dividend? Is it compulsory to transfer profit to reserve?Is it compulsory to transfer profit to reserve?

Questions?Questions?

State the provision for unpaid dividendState the provision for unpaid dividend Can company declared dividend out of Can company declared dividend out of

capital profit?capital profit? What are capital profits?What are capital profits? Can company declare dividend twice a Can company declare dividend twice a

year other than interim dividend?year other than interim dividend? Can company declare dividend without Can company declare dividend without

passing resolution in adoption of final passing resolution in adoption of final accountsaccounts