Divisible Profit

Divisible Profit

1. Divisible profitDivisible profit
By By
Prof. L.Augustin AmaladasProf. L.Augustin Amaladas
M.com.,AICWA.,B.Ed.,PGDFMM.com.,AICWA.,B.Ed.,PGDFM

2. 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

3. 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

4. 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

5. 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

6. 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

7. DepreciationDepreciation
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.

8. 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.

9. Interim dividendInterim dividend
Section 2(14A) of companies Act defines dividend Section 2(14A) of companies Act defines dividend
to include interim dividendto 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.

10. 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.

11. 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.

12. 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.

13. 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

14. 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.

15. 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.

16. 4. Dividend includes interim 4. Dividend includes interim
dividenddividend
Section 2(14A) of companies Act defines dividend Section 2(14A) of companies Act defines dividend
to include interim dividendto 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.

17. 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%

18. 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.

19. 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.

20. 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

21. 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 Penalty:Sec.205A(4):1. Penalty to
directorsdirectors
2. 12% interest per annum to such 2. 12% interest per annum to such
members payable by the companymembers payable by the company

22. 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 accountdate of transfer to unclaimed account

23. 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.

24. 12.Claim from IEPF12.Claim from IEPF
No claim is allowed[Sec.205C]No claim is allowed[Sec.205C]

25. 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]

26. 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 transferor company has to transfer
to unpaid dividend account and keep to unpaid dividend account and keep
abayance till the title to shares abayance till the title to shares
decided.decided.

27. 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.

28. 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

29. 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

30. 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 TO -RELEASE OF COMPANY ASSET FOR DISTRIBUTION TO
SHARE HOLDERS 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

31. 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 TO -RELEASE OF COMPANY ASSET FOR DISTRIBUTION TO
SHARE HOLDERS 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

32. Income taxIncome tax
Dividend excludes:Dividend excludes:
Buy back of shares(77A of Buy back of shares(77A of
companies Act)companies 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.

33. 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

34. 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%

35. 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

36. 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?

37. 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