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Payment of dividend out of accumulated profits

Karthik (C A Student) (219 Points)

27 February 2012

A Private limited Company wants to declare dividend out of its previous year profits(Accumulated Profits). It has never paid dividends in any previous years. May I know the rules for the transfer to the reserves , and is it applicable to this kind of payment of dividends ? Also could I know the complete procedure with respect to Companies Act, FEMA/RBI Guidelines, Income Tax Act, etc.

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6 Replies

Keval Ponkiya (CA CS MBA(Fin.) M.Com. L.L.B.) (223 Points)
Replied 27 February 2012

Yes it can pay dividend out of pr.yr profit. And for that it has to transfer the profit as per % of dividend declare.

Ashish Gaggar (Propritor) (85 Points)
Replied 27 February 2012

Kindly refer Companies (Declaration of Dividend out of Reserves) Rules, 1975 for the complete procedure

Regards

Ashish

Karthik (C A Student) (219 Points)
Replied 29 February 2012

Mr Ashish Gaggar,

Kindly note that the company wishes to pay dividends out of accumulated profits and not reserves !!!

Are these the same ? :/

Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 29 February 2012

Dear Kartik. What Ashish has said is correct. The prevvious years profits are shown under the head Reserves & surplus. These are the profits that accumulate each year & are shown as Reserves & Surplus.So the Companies(Declaration of dividends out of Reserves) Rules shall apply.

Karthik (C A Student) (219 Points)
Replied 01 March 2012

Mr Giridhar,

PLEASE READ THAT RULE PROPERLY !!!

Its the Companies (Declaration of Dividend out of Reserves) Rules, 1975 where does it speak about SURPLUS ???

I have repeated that profits are retained under accumalated profit THERE HAS BEEN NO TRANSFER TO ANY KIND OF RESERVE !!!

SO PLEASE STOP MISGUIDING PEOPLE HERE IF YOU DONT KNOW SOMETHING !

DONT SPREAD IGNORANCE AROUND !!

Karthik (C A Student) (219 Points)
Replied 01 March 2012

I HAVE GONE THRU THE SECRETARIAL STANDARD ON DIVIDEND, ISSUED BY

The Institute ofCompany Secretaries of India

and its clearly mentioned in one of their para's

1.1.4 No Dividend should be declared unless the prescribed percentage of profit is transferred to reserves in accordance with the Companies (Transfer of Profits to Reserves) Rules, 1975.

In case Dividend is paid out of the opening balance in the profit and loss account, the company should make the prescribed transfer to reserves as if the Companies (Transfer of Profits to Reserves) Rules, 1975 are applicable. However, the company would not, in such a case, be required to comply with the Companies (Declaration of Dividend out of Reserves) Rules, 1975.

The Companies (Transfer of Profits to Reserves) Rules, 1975 only apply to equity Dividend and to that portion of Dividend relating to participating preference shares which is in excess of the fixed rate of preference Dividend.

SO WHY ARE YOU PLAYING GAMES HERE ?? STOP MISGUIDING PEOPLE IF YOU ARE NOT 100% SURE ABOUT SERIOUS ISSUES !!!