CHAPTER III

DIVISIBLE PROFIT
The word “Dividend” has origin from the Latin word “Dividendum”. It means a thing to be
divided. Dividend means the portion of the profit received by the shareholders from the
company’s net profit, which is legally available for distribution among the members. Therefore,
dividend is a return on the share capital subscribed for and paid to its shareholders by a company.
Dividend defined under section 2(35) of the Companies Act, 2013, includes any interim
dividend.

Dividend: As per Section 2(35) of Companies Act, 2013 defines the term as including any
interim dividend.

 Dividend is basically the share of profit distributed among shareholders.

 Ordinary meaning of dividend is a share of profits, whether at a fixed rate or otherwise,
allocated to holders of shares in a company.
 Dividend can be paid on Equity or preference shares both.
 The word “Dividend” has origin from the Latin word “Dividendum”. It means a thing to
be divided.

Section under CA
Section under
Matters dealt with
CA 2013
1956
2(35) 2(14A) Definition of Dividend
Payment of dividend in proportion to amount paid
51 93
up.
Declaration of book closure/Record date and
91 154
publication of notice of record date/book closur
Payment of dividend-sources, conditions, transfer
123 205
of profits to reserve, etc.
Dividend shall be paid to registered shareholders
and beneficial owners under CSDL/NSDL Opening
of a separate bank account for making payment of
123(5) 205, 205A(3)
dividend and deposit the amount of dividend into
the account within a period of 5 days of its
declaration
Restriction on payment of dividend on equity
126(6) 205
shares on failure to comply with Deposits
Unpaid dividend to be transferred to special
124 205A
dividend account.
Right of dividend, etc. — When to be kept in
126 206A
abeyance.

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 Payment of dividend must be made within 30 days
127 207 of its declaration and penalty for failure to pay
dividend within prescribed time limit.

Types of dividend: There are following types of dividend:—

a. Interim dividend; and

b. Final dividend

c. Preference share Dividend

Meaning of Final dividend:

Dividend is said to be a final dividend if it is declared at the annual general meeting of the
company. Final dividend once declared becomes a debt enforceable against the company.

Source for payment of Dividend: Dividend can be paid out of Followings mentioned below:
Section- 123 (1)(a)

i. Profit of the current year after providing of the depreciation; or

ii. Profit of the previous financial year or years after providing for depreciation for previous
years; or

iii. Out of the money provided by Central or State Government for payment of dividend in
pursuance of guarantee given by that, if any.

CONCEPT OF PROFIT

The main objective of any business organisation is profit, but the term ‘profit’ does not have any
exact meaning in the accountant’s language. Profit may be defined “as the increase in the net
value of assets of a business over their net value at the commencement of a given period which
has arisen other than by capital adjustment”.

According to the viewpoint expressed by the court in the case Spanish Prospecting Co. Ltd.
(1911), “the profit of an enterprise can be ascertained by computing the market value of its net
assets at two accounting dates. The increase or decrease in the net worth is the profit or loss for
the intervening period”.

The Institute of Chartered Accountants of India has defined ‘profit’ in its Guidance Notes on
Terms used in Financial Statements as “the excess of revenue over related costs”.

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PROFIT VS DIVISIBLE PROFIT

All the profits of a company cannot be said to be divisible. Only those portions of the profit,
which can be legally distributed to the shareholders of the company in the form of dividends, are
called as divisible profits. A number of factors are required to be considered for the
determination of divisible profit. Out of different important factors, the following four
considerations govern the determination of divisible profit to a great extent:

 Accounting principles
 Provisions of the Companies Act
 Provisions of the Memorandum and Articles of Association
 Legal judgments

Well, subject to the provisions of Companies Act, 2013, All Companies, except those
companies which are registered under sec-8 (i.e. Non-profit organizations) can declare
dividend.

 Under Companies Act – 2013, Chapter VIII containing sections, which deals with the
provisions related to declaration and payment of dividend. Section – 123 to 127 deals
with the provisions related to the declaration and payment of dividend.

 Let’s have a look on the prov. related to the declaration and payment of dividend

1. Provisions related to Declaration of dividend (Sec- 123)

Dividend is to be declared by the company at its Annual General meeting on such rate as may be
recommended by board, and it has no power to declare dividend exceeding the amount
recommended by the board. Once declared, it becomes debt payable by the company to its
shareholders, who can sue the company for the non-payment of the dividend.

A company cannot pass a resolution for the declaration of dividend, without passing a resolution
for the adoption of accounts. Hence, a company shall adopt its books of accounts first and then
only, entitled to declare the dividend.

Sources of Dividend

The basic principle of declaration of dividend is that it shall be paid out of profits only. However
as per companies act dividend can be paid out of-

1) Current year’s profit of the company, or

2) Undistributed or accumulated profits of the previous years, or

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3) 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.

Conditions required to be satisfied for declaration of dividend

1) Depreciation: – Before the declaration of dividend, a company shall provide depreciation to

all its depreciable assets, in accordance with the rates or useful life, as the case may be provided
in Schedule – II of Companies Act -2013.

2) Transfer to Reserves :- 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.

3) Set off of previous year losses and depreciation: –A company shall not declare dividend
unless carried over previous losses and depreciation not provided in previous year or years, are
set off against profit of the company for the current year.

4) Free Reserves: – A company shall not declare or pay dividend out of its reserves, other than
free reserves.

Note: – In case of, Inadequacy of Profits resulting declaration of dividend out of previous year
undistributed profits: – 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 Companies (Declaration and Payment of Dividend)
Rules, 2014.

Conditions for declaration of dividend out of surplus reserves

Hence, as per Companies (Declaration and Payment of Dividend) Rules, 2014 a company may
declare dividend out of surplus reserves subject to the fulfillment of the following conditions,
namely:-

1) Rate of Dividend: – The rate of dividend declared shall not exceed the average of the rates at
which dividend was declared by it in the three years immediately preceding that year.

However, this condition shall not apply to a company, which has not declared any dividend in
each of the three preceding financial year

2) Total Amount to be withdrawn: – The total amount to be drawn from such accumulated
profits shall not exceed one-tenth of the paid-up share capital and free reserves as appearing
in the latest audited financial statement.

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3) Utilization of withdrawn amount: – The amount so drawn shall first be utilized 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.

4) Balance amount of Reserves:- 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.

2. Payment of Dividend

According to the provisions of Companies Act – 2013, No dividend shall be payable except by
way of cash, where dividend payable in cash can also be paid through cheque, warrant or in any
electronic mode, to the shareholder who is entitled to the dividend.

Condition: – A company who has committed any default in compliance with the provisions of
sec- 73 and 74 relating to the acceptance and repayment of deposits would be barred to declare
dividend.

3. Interim Dividend

According to the provisions of section – 123(3), Board of directors of a company may declare
interim dividend during any financial year, out of the profits made by the company during such
financial year or out of previous year undistributed profits (subject to Companies (Declaration
and Payment of Dividend) Rules, 2014) .

As per Section- 2(35) “dividend includes interim dividend” signifies that the provisions of
Companies Act 2013, applicable to the final dividend to the extent possible, shall also applicable
on interim dividend.

4. Unpaid Dividend Account (Sec- 124)

There are some cases wherein, dividend declared by the company has not been paid or claimed
and in case where such dividend remained unpaid or unclaimed within 30 days from the date of
declaration; company shall take the following necessary steps-

(a) Open a special account with a scheduled bank to be called “ Unpaid dividend account of
…………………….(Company Limited/Company( Private) Limited”

(b) Transfer the unpaid or unclaimed amount of dividend within a period of 7 days from the
expiry of such 30 days, to the special account.

In case of default- If the company committed any default, in transferring such amount to the
special account with in the specified time, company shall be liable to pay interest @ 12% p.a.
from the date of such default.

Investor Education and Protection Fund.— The Central Government shall establish a Fund to be
called the Investor Education and Protection Fund (herein referred to as the Fund). the amount in the
Unpaid Dividend Account of companies transferred to the Fund under sub-section (5) of section 124;

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5. Punishment for failure to distribute dividend (Sec-127)

According to the provisions of sec- 127 of the companies act – 2013, if a company fails to pay
the dividend, within a period of 30 days from the date of its declaration, to the shareholders who
are entitled to the dividend then-

Liability of Imprisonment Fine

Interest @ 18% p.a. for the

Company NA
period of default

Rs. 1000/- for every day, during

Every director of Company May extend to 2 years
which such failure continues.

Exceptions to sec- 127 –Following are the situation under which, no offence shall be deemed to
have been committed, namely-

(a) Where the dividend could not be paid by reason of the operation of any law;

(b) 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;

(c) Where there is a dispute regarding the right to receive the dividend;

(d) Where the dividend has been lawfully adjusted by the company against any sum due to it
from the shareholder; or

(e) 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.

6. Procedure of Declaration and Payment of Dividend

(a) Issue atleast 7 clear days notice of the meeting of Board of directors in accordance with the
sec- 173 of the companies Act – 2013.

(b) In case of listed companies, notify stock exchange(s) where the securities of the company are
listed, at least 2 working days in advance of the date of the meeting

(c) Hold Board meeting and pass resolutions for following purposes-

 Approving the annual accounts (balance sheet and profit and loss account of the company
for the year ended);
 Recommending the final amount of dividend;
 Determining the date of book closure;
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  Fixing the Day, Date, Time and Venue of AGM;
 Approving the notice of AGM;
 Authorizing the Company Secretary/Director to issue the notice of AGM;

(d) In case of listed companies, give 7 days’ notice of book closure to the stock exchanges.

(e) In case of listed company, publish notice of book closure in a newspaper circulating in the
district in which the registered office of the company is situated at least seven days before the
date of commencement of book closure.

(f) Close the register of members and the share transfer register of the company.

(g) Hold a Board/committee meeting for approving registration of transfer/ transmission of the
shares of the company, which have been lodged with the company prior to the commencement of
book closure.

(h) Hold the annual general meeting and pass an ordinary resolution declaring the payment of
dividend to the shareholders of the company as per recommendation of the Board.

(i) Prepare a statement of dividend in respect of each shareholder.

(j) Ensure that the dividend tax is paid to the tax authorities within the prescribed time.

(k) Open a separate bank account for making dividend payment and credit the said bank account
with the total amount of dividend payable within five days of declaration of dividend.

(l) If the company is listed, then for payment of dividend it has to mandatorily use, either directly
or through its Registrars to an Issue and Share Transfer Agents (RTI & STA), any Reserve Bank
of India approved electronic mode of payment such as Electronic Clearing Services (ECS),
National Electronic Fund Transfer (NEFT), etc.

(m) Make arrangements with the bank and in collaboration with other banks if required, for
payment of the Dividend Warrants at par.

(n) Dispatch dividend warrants within thirty days of the declaration of dividend. In case of joint
shareholders, dispatch the dividend warrant to the first named shareholder.

(o) Arrange for transfer of unpaid or unclaimed dividend to a special account named “Unpaid
dividend Account” within 7 days after expiry of the period of 30 days of declaration of final
dividend. (Section 124).

(p) Transfer unpaid dividend amount to Investor Education and Protection Fund (IEPF) after the
expiry of seven years from the date of transfer to unpaid dividend A/c

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 LEGAL VIEWS AS REGARDS DIVIDEND

Case Study

1. Case: Lee vs Neuchatel Co. Ltd. (1889)

Fact of the case: The Articles of Association of the company provided for the
distribution of profit on preference shares and ordinary shares at the rate of 7% and 4%
respectively. For that the consent of the shareholders is a must. Moreover, the Articles of
Association of the company contained a clause which does not bind the directors to make
reserve for replacement or renewal of any property. The Directors decided to declare
dividend out of profits of the company to the preference shareholders without making
good the loss of depreciation of wasting assets, i.e. mines and other assets of the
company. One of the ordinary shareholders Mr. Charles John Lee brought an action
against the Directors of the company restraining them to pay dividend without making
good the depreciation of assets of the business.

Legal view: It was held that the company may distribute dividend without making good
the depreciation on wasting assets, if it is authorised by its Articles of Association to do
so. In fact, the object of charging depreciation is for the replacement of assets, but when
the wasting assets are subject to exhaustion the company is formed to go into liquidation,
the question of replacement does not arise.

2. Case: Bolton vs Natal Land and Colonisation Co. Ltd. (1892)

Fact of the case: The business of the company consisted of buying, selling, letting,
cultivating and otherwise dealing with land in South Africa. In the year 1892, the
company, under peculiar circumstances debited to its profit and loss account £ 70,000 as
bad debt and credited in the same profit and loss account with an equal amount arising
from revaluation in the value of land, over and above the cost price. Accordingly, the
profit and loss account was balanced. Subsequently, the company earned working profit
and declared dividend from the said source in respect of the arrear dividend of 1885.

Legal view: An action was brought before the court against the company restraining it to
capitalise a part of the reserve that has been created by revaluation of assets of the
company. The basic reason behind such action was that the profits of the business are not
realised. But it was held that surplus of capital assets resulting from bonafide revaluation
of assets, even though it is unrealised, may be available for issuing bonus shares. The
application of this decision cannot be made possible in India after the introduction of the
Indian Companies Act, 1956.

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 3. Case: Foster vs The New Trinidad Asphelte Co. Ltd. (1901)

Fact of the case: The company along with the assets of the other company took over a
debt of £ 1,00,000 secured by promissory note, at its formation. At that time, the debt was
considered valueless. Later on, the debt was paid in full together with an interest accrued
amounting to £ 26,258. 16s. The directors proposed to distribute the amount as dividend
as the directors treated the said amount as capital profit. But one shareholder, brought an
action before the court restraining the company to pay dividend on the ground that the
decrease in the value of other assets should have been considered.

Legal view: It was held in this case that the question of what is profit available for
dividend depends upon the results of the whole accounts taken fairly for the year, capital
as well as profit and loss, and though dividends may be paid out of earned profits in
proper cases, notwithstanding a depreciation of capital, a realised accretion to the
estimated value of one item of capital asset cannot be deemed to profit divisible among
the shareholders without reference to the result of the whole account fairly taken.

4. Case: Ammonia Soda Co. Ltd. vs Arthur Chamberlain and others (1918)

Fact of the case: An action was brought by the company against the former two
Directors, asking them to refund to the company a sum amounting to £ 1268. 14s. 4d.
which was illegally paid as dividend during the years from 1912 to 1915. The company
was incorporated as a private limited company in July 1908. Thereafter by a special
resolution, passed in October 1911, it was converted into a public limited company. The
company’s profit and loss account showed a debit balance amounting to £ 19,028. 5s. 4d.
The directors were entrusted to value the land, and accordingly it was valued at £ 79,166
and the addition of expenses for the innovation of new bed of rockself amounting to £
20,542. 2s. 4d. was added to the value of land. The sum was credited to reserve account
and was used to write-off the following:

1. The debit balance of the profit and loss account amounting to £ 12,970. 18s. 3d.
2. Goodwill for £ 1,500
3. Cash bonus for £ 1,980

And the balance £ 4,091. 4s. 5d. was transferred to reserve account. During half year
ended 31.01.1912, the company made net profit of £ 7,348. 13s. and the value of the land
was increased in the balance sheet to the extent of £ 16,450. 18s. 3d. and thus eliminating
the credit balance for £ 4091. 4s. 5d. which was left to the credit of the reserve account.
During the years 1912 to 1915 dividends amounting to £ 1,268. 14s. 4d. were paid to the
preference shareholders.

Legal view: The court decided that the assets of the business may be written up as a
result of bonafide revaluation and that the current profits may be divided without making
good past losses of the business. But the decision of this case in no way holds good in
India after the introduction of Section 205(1)(b) of the Indian Companies Act, 1956.

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5. Case: Stapley vs Red Brothers (1924)

Fact of the case: The company had written off the balance of goodwill account £ 51,000
out of reserve. In a later year, the profit having been found inadequate for both setting off
the debit balance of the profit and loss account and paying dividend on preference shares
including arrear dividend, the Directors decided to write up goodwill by £ 40,000, being
the conservative value of goodwill and credit the sum to reserve account which could be
utilised for writing off the debit balance £ 25,500 of the profit and loss account and
paying the dividend. A shareholder, thereupon, moved the court for an injunction to
restrain the directors from writing back £ 40,000 which was previously written off out of
reserves created from profit.

Legal view: It was held that a company could write up at a fair value the goodwill, which was
written off excessively in the earlier years and utilise the sum for writing off the debit balance of
the profit and loss account and distribute the current profit as dividend

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