Dividend out of past profits

This query is : Resolved

Guest

Guest (Querist)

05 December 2014 proviso of 123(1):
"Provided further that 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 such rules as may be prescribed in this behalf"

Does here accumulated profits include opening credit balance of St. of Profit & Loss included or not?

Guest

Guest (Querist)

05 December 2014 Dear experts, please explain the rule in simple terms.

Companies (Declaration and Payment of Dividend) Rules, 2014
Rule 3(5): No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company of the current year the loss or depreciation, whichever is less, in previous years is set off against the profit of the company for the year for which dividend is declared or paid.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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21 July 2024 The provision you're referring to, under Section 123(1) of the Companies Act, 2013 and Rule 3(5) of the Companies (Declaration and Payment of Dividend) Rules, 2014, deals with the declaration of dividend out of accumulated profits. Let me break down the key points and address your query:

1. **Accumulated Profits:**
- Accumulated profits generally include the profits earned by the company in previous years and carried forward to subsequent years, after adjustments for losses, depreciation, and other statutory deductions.
- This typically includes:
- Profits earned in previous financial years and carried forward.
- Profits transferred to reserves from previous years.
- Any surplus in the statement of profit and loss after adjusting for losses and appropriations.

2. **Opening Credit Balance of Statement of Profit and Loss:**
- Yes, the accumulated profits generally include the opening credit balance of the Statement of Profit and Loss. This balance represents the retained earnings or accumulated profits carried forward from previous financial years, which are available for appropriation or distribution as dividends.

3. **Rule 3(5) of Companies (Declaration and Payment of Dividend) Rules, 2014:**
- This rule specifies that before declaring a dividend, a company must set off any carried forward losses and depreciation from previous years against the current year's profits.
- The amount available for declaring dividend is the balance of current year's profits after adjusting for losses and depreciation of previous years, whichever is less.

4. **Impact on Declaration of Dividend:**
- Before declaring dividends, companies need to ensure compliance with Rule 3(5) to determine the available profits.
- This ensures that dividends are not declared out of fictitious profits but from genuine earnings available after meeting all statutory requirements and adjustments.

**In Summary:**
Accumulated profits for the purpose of declaring dividends include the opening credit balance of the Statement of Profit and Loss, which represents retained earnings carried forward from previous years. Companies must adhere to Rule 3(5) to set off previous year's losses and depreciation against the current year's profits before declaring dividends, ensuring compliance with statutory requirements and safeguarding shareholder interests.

For precise application to your specific situation or for detailed guidance, consulting a qualified chartered accountant or legal advisor familiar with corporate taxation and company law in India is recommended.

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