1. Clause (35) of section 2 of the Companies Act, 2013 (‘the Act’) defines dividend as “dividend includes any interim dividend”. Therefore, all provisions under Chapter VIII of the Act and under the Companies (Declaration and Payment of Dividend) Rules, 2014 shall apply to interim dividend as well. Further, sub-section (3) of section 123 of the Act stipulates for declaration of 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. Interim dividend is generally declared, in the middle of a financial year or before the annual accounts is made up, by cash rich and profitable companies, especially to cope with the promoters need for funds. Interim dividend may also be declared by such companies in case of unprecedented situation as created by the Finance Bill, 2016 presented by the Finance Minister in Lok Shabha on 29th February, 2016. Vide clause 50 of the Finance Bill, 2016, a new section 115BBDA has been sought to be inserted in the Income tax Act, 1961 with effect from the 1st day of April, 2017 (i.e., assessment year 2017-18) levying tax on certain dividends received from domestic companies. Sub-section (1) of the proposed section 115BBDA reads as follows:
“(1) Notwithstanding anything contained in this Act, where the total income of an assessee, being an individual, Hindu undivided family or a firm, resident in India, includes any incomes exceeding ten lakh rupees, by way of dividends declared, distributed or paid by a domestic company, the income tax payable shall be the aggregate of –
- the amount of income-tax calculated on the income by way of such dividends, at the rate of ten per cent: and
- the amount of income tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount of income by way of any dividends”
TAX ON DIVIDENDS IN EXCESS OF RS. 10 LAKH RECEIVED IN ANY YEAR
2. The proposed provision stipulates that any dividends received from a domestic company by a resident individual, HUF or firm in excess of Rs. 10 lakh in any year commencing 1st April, 2016 will attract income tax at the rate of 10 per cent, which would, otherwise, be exempt if received by such an assessee before 31st March, 2016.
Sub-section (2) of that section is also very harsh. It stipulates that
“no deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee under any provision of this Act in computing the income by way of dividends referred to clause (a) of sub-section (1)” in computing the dividend income so taxable.”
This alerted the India Inc. and there was a rush in every worthwhile company to assess if any interim dividend can be declared/distributed/paid before the current financial year 2015-16 ends on 31st March, 2016 in terms of sub-section (3) of section 123 of the Act lest it becomes taxable income in the next financial year 2016-17 in the hands of big individual/HUF, etc., shareholders, especially the promoter shareholders. The proposed section will trigger even if interim dividend declared/distributed before March 2016, i.e., within financial year 2015-16, but received by the shareholders after 1st April, 2016, i.e., within financial year 2016-17.
DECLARATION OF INTERIM DIVIDEND TO AVOID RIGOURS OF SECTION 115BBDA OF THE INCOME-TAX ACT
3. Now comes the procedural part for giving effect to the declaration/distribution of interim dividend to avoid the rigours of the new provision under the Income tax Act. An unlisted company could do it easily by passing a Board resolution, in terms of sub-section (3) of section 123 of the Act. For this purpose, a Board meeting could be convened by giving seven days’ notice, or even shorter, for declaration of interim dividend and make payment thereof within 31st March, 2016. However, the Board resolution could be passed even by circulation as there is no restriction under section 179 of the Act and rule 8 of the Companies (Meetings of the Board and its Powers) Rules, 2014 and this is not required to be filed with the Registrar of Companies under sub-section (3) of section 117 read with sub-section (3) of section 179 of the Act.
Declaration of dividend by listed company – Stringent provisions under the Listing Obligation Regulations
3.1 The listed companies, however, have a little long drawn process and time sensitive deadlines for declaring dividend (including interim dividend) and had to comply with many steps resulting in time constraint in passing a Board resolution at a duly convened Board meeting in view of various stringent provisions under the SEBI Listing Obligations and Disclosure Requirements) Regulations, 2015, (Listing Obligation Regulations). These provisions are as follows:
- Prior intimation under regulation 29 at least two clear working days notice for declaration/recommendation of dividend.
- Record dates under regulation 60 at least seven clear working days notice. Record date can be fixed/intimated after the Board approval of the event.
- Event disclosure under Schedule III.A.A.4.a – outcome of Board meeting within 30 minutes of closure of the meeting, i.e., rate, date of dispatch, etc.
- Notice for convening Board meeting under sub-section (3) of section 179 and Secretarial Standard (SS)- at least seven days before the date of the meeting.
- Finalization of board meeting minutes – minimum seven days waiting period for comments from the directors, in terms of clause 7.4 of S S -1.
Besides, there were 10 non-working days leaving a fewer working days available during March, 2016 to complete all the processes/events for declaring and distributing interim dividend, e.g. computation of surplus/profits to determine eligibility, if any, for declaration of interim dividend under sub-section (3) of section 123, opening of separate bank account under section 124 of the Act, arrangement/transfer of funds to the bank account, printing of ‘payable at par’ dividend warrants, putting in place the facility of payment of dividend through electronic mode, etc. etc.
CAN INTERIM DIVIDEND BE DECLARED BY PASSING BOARD RESOLUTION BY CIRCULATION?
4. There was a great hassle of time constraint to declare interim dividend at a board meeting in a regular manner and complete the process of its payment. To overcome this hassle, a view emerged that interim dividend be declared by passing the requisite Board resolution by circulation, which, in terms of section 175 of the Act and clause 6 of SS-1 can be passed without any waiting period. And, this may hasten/hurry up the process of declaration or distribution/payment of dividend within the convenient time deadline of 31st March, 2016 and many companies, including a few listed companies, resorted and adhered to this view as there is no bar under the Act for declaring dividend by circular Board resolution. However, with respects, it is submitted that this view is incorrect in the case of listed companies for the various restrictions/provisions under the Listing Obligations Regulations. The relevant provisions of these Regulations are as follows:-
- SEBI Regulations do not envisage, even though do not specifically bar either, obtaining Board approval to any matter by passing a resolution by circulation. Listed companies may, however, take advantage of the provisions of the Companies Act to pass a Board resolution by circulation in such cases where the Companies Act and/or SEBI Regulations do not specifically provide for a board meeting.
- Under regulation 29(1) prior intimation is to be given to Stock Exchanges about meeting of the board of directors for declaration of dividend.
- Under regulation 30(6) read with Schedule III.A.A.4a– Disclosure has to be made to the stock exchanges of the outcome of meetings of the Board of directors about dividend and the date of dispatch, within 30 minutes of the closure of the meeting.
- In any case, it is an undesirable corporate practice to substitute approval at board meeting by approval by circular resolution, by circumventing the provisions.
After the Board meetings respectively, it not only implies but mandates that dividend declaration can be considered/declared only at the board meeting and the listed companies cannot resort to the short cut of declaring dividend by circular resolution. I wish SEBI/stock exchange does not initiate any penal action under rule 98 of the Regulations for approval of the interim dividend declared by the Board of directors of listed companies by passing the resolution by circulation
Tags Corporate Law