Declaration of dividend without adequate profits

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Suraj S (Querist)

31 May 2012 One of my client is a non-listed public company. The company has been making losses in the past few previous years and it has an accumulated loss in its Balance Sheet. This year the company has been able to make profit enough to cover the accumulated loss. But, the company's mgt. is keen to declare dividend during for the year ended 31st March, 2012. The quantitative details are below:

Accumulated Loss - Rs. 30,00,000.00

Current Year Profit - Rs. 50,00,000.00

Dividend Proposed - Rs. 30,00,000.00

Now, my question is after set off of losses the surplus of the company would be only Rs. 20,00,000.00 but the mgt. has decided to propose dividend of Rs. 30,00,000.00. It has no other accumulated reserves. Can the company do so? The mgt. after consulting some experts is claiming that they can declare dividend this year even though they are short of Rs. 10,00,000.00. What is your opinion in this scenario?

CS SAJU PHILIP MANALEL

CS SAJU PHILIP MANALEL (Expert)

31 May 2012 YES , the company can do so.
Proviso (b)to Section 205 (1) of the Companies Act says that ‘if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960 , (65 of 1960 .) then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation in accordance with the provisions of subsection (2) or against both’
Thus it is not necessary to set off entire accumulated losses from the profit, instead it is only required to set off that part which is equal to the depreciation which had not been provided for in respect of all the past year as well as the current year. If after setting off the said depreciation the balance amounts to be Rs 30.00 crores, then the company can proceed to declare dividend of Rs 30.00 crores, subject to the Transfer to the Reserve as required under Section 205(2A)

CS Saju Philip
sajuphilipcs@yahoo.com