EXPERT - Dividend query - 205(3)

First of all dividend can be paid out of

1. The profits of the Company for that year (after providing for depreciation) or

 

2. Profits of the Company for any previsous financial years remaining undistributed or

 

3.Out of both or

 

4.Out of moneys provided by the Central Government or State Government for the payment of dividend in pursuance of a grarantee given by that government.

 

Further no dividend shall be declared or paid by a company for any financial year out of the profits of the Company for that year arrived at after providing for depreciation except after the transfer to the reserves of the company of such percentage of profits for that year, not exceeding ten percent, as may be prescribed. HOwever, the company may transfer higher percentage of profit to reserve in accordance of Companies (Transfer of Profits to Reserve) Rules, 1975.

 

In my opinion Company can pay dividend out of P&L account.

 

 

 

 

Thanks sir for your valuable opinion.

 

Please clear my one more query.

The company is paying the profit out of Profit and loss account, which is disclosed in the balance sheet  of 2008-09.

 

The company has made loss in 2009-10

This loss, and depreciation of 2009-10 we have set off with P&L opening balance.

Still there is balance left in the Profit and loss account, and we are going to declare dividend from that.

 

Now, i have a doubt regarding the transfer to reserves.

Logically, we should transfer from P&L balance after making a dividend provision....

 

But as per MCA,

“The amount to be transferred to the General Reserves would be worked out in respect of profits of the year in question and without bringing in the profits of the past years”

(Letter no. 8/2 (Misc) 75-CLV-V, dated 6^th June, 1975)

 

So we are in dilemma whether to transfer (Since not current year profit), and what amount???

 

In my opinion transfer of profit to reserves relates with the profit of 'that' year therefore, in case of loss you are not required to transfer profit ot reserve.

1. As per Deptt. clarification- the rules do not prohibit a company from carrying forward any balance of the Profit and loss account, without transferring them to reserves. 2. As profits have not been transferred to General Reserves, the distribution will not attract declaration of dividend out of reserves rules. 3. Dividend can be paid from both. 4. Transfer to reserve i being done from the current year's profit so no need to transfer. Regards,

Thanks vivek sir.