Dividend

The term ‘dividend’ is not defined in the Act.

Further the Act does not mention any specific power to the companies registered
under it to declare and pay dividends.
The power to pay dividend is, however, inherent in every company and therefore it
need not be given either in the Act or in memorandum or Articles.

One of the main objects of commercial enterprises is to earn profits which are disturbed
among shareholders by way of ‘dividend’. In commercial usage, ‘dividend’ is the share of
the Company profits distributed among the members.

meanings:

In Commr. Of Income-tax v Girdhadas & Co, it was observed that the term ‘dividend’
has two meanings:

1. as applied to a company which is a going concern, it ordinarily means the portion

of the profits of the company which is allocated to the holders of shares in the
company
2. in the case of a winding up, it means a division of the realized assets among the
creditors and contributories according to their respective rights

Dividends are profits of a trading company divided amongst members in proportion to

their shares.
Such proportion may be determined by the articles; if not, dividends may be paid on
each share in proportion to the nominal value of that share without reference to the
amount actually paid up thereon, for members are ‘prima facie’ entitled to participate in
the profits of a company in proportion to their respective interest therein, and the
nominal amount of capital held by each is the measure of such interest.

Hence, in brief, a dividend is that portion of the distributable amount of profit to which
each member is entitled when it is formally declared in the Annual General Meeting of
members.
It follows from it that if no profits are made or if none are made available for
distribution, no dividend will be declared.

Hence, dividend means the profit that is divided amongst the members of the company
on the basis of the shares held by them.

Dividend to be Paid only Out of Profits (Section 123) :

No dividend shall be declared or paid by a company except out of profits.

It means that the dividend cannot be paid out of capital.

It may be paid out of the profits of that particular year, or out of the profits for any
previous year.

Only such profits can be distributed as dividend which have been arrived at after
providing for depreciation.

The Central Government may, if it thinks necessary in public interest, allow any
company to declare or pay dividend for any financial year out of the profits of the
company for that year or any previous financial year or years without providing for
depreciation.

If the company has incurred some loss in any previous financial year or years, then the
amount of that loss or an amount 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 profits for
any previous financial year or years, after providing for necessary depreciation.
It has been held by the Supreme Court in M/s Surana Steel Ltd. v. Dy. Commissioner, I.
Tax33, that the loss is to be arrived at after taking into account the depreciation provided
for. Therefore, the word “loss” signifies the amount arrived at after taking into account the
amount of depreciation and it has to be so read and understood in the context of section
115-J of the Income Tax Act, 1961. If loss were to be taken as pre-depreciation loss,
then the resultant computation shall not be in conformity with the tenor of the provisions
of section 123.

The Companies (Amendment) Act, 1974 has introduced a provision which requires every
company to transfer to the reserves of the company such percentage of profits for that
year, not exceeding 10%, as may be prescribed, before the dividend is declared or paid
by a company for any financial year.

Interim Dividend : Section 2(35) defines dividend and states that “dividend” includes
interim dividend.

The Supreme Court had held in J. Dalmia v. C.I.T.34 that a resolution to pay interim
dividend did not create a debt against a company. The directors, therefore, could revoke
the resolution declaring interim dividend. Now, section 2(35), declaring ‘dividend’ to
include interim dividend, puts interim dividend at par with final dividend. It has, thus, the
effect of nullifying the effect of the above mentioned Supreme Court decision.

Investor Education and Protection Fund (Section 125) : It provides for the
establishment of a “Fund” by the Central Government, to be known as the Investor
Education and Protection Fund. It aims at utilisation of the Fund for promotion of
investors’ awareness and promotion of the interests of the investors in accordance with
such rules as may be prescribed. The Central Government shall specify an authority or a
committee to administer the “Fund”, who will administer the Fund for carrying out the
objects for which the Fund has been established.

There shall be credited to the Fund the following amounts–

a) amounts in the unpaid dividend accounts of companies;
b) the application moneys received by companies for allotment of any securities and
due for refund;
c) matured deposits with companies;
d) matured debentures with companies;
e) the interest accrued on the amounts referred to in clauses (a) to (d);
f) grants and donations given to the Fund by the Central Government, State
Governments, companies or any other institutions for the purposes of the Fund;
and
g) the interest or other income received out of the investments made from the Fund;
Provided that no such amount referred to in clauses (a) to (d) shall form part of the Fund
unless such amounts have remained unclaimed and unpaid for a period of seven years
from the date they became due for payment.

Dividend to Registered Holders Pending Registration of Transfer of Shares

(Section 126) : Section 126 deal with a situation when instrument of transfer of shares
has been delivered to a company for registration of the transfer of shares, but before the

33
A.I.R. 1999 S.C. 1455
34
(1964) 34 Comp. Cas. 683 (Supreme Court)
 same has been done, the company declares dividend, rights shares, or bonus shares. In
such a case the company should transfer the dividends to the ‘Unpaid Dividend Account’
referred to in section 205A, unless the transferor of shares has specified in writing that
such dividend is to be paid to the transferee specified in such instrument. Similarly, any
offer of rights shares or bonus shares has to be kept in abeyance till the title to the
shares is decided.

Penalty for Failure to Distribute Dividends within 30 Days (Section 127) : Section
127 requires payment of dividend within 30 days of its declaration. If the dividend is not
paid to a shareholder entitled to the payment of the same within the prescribed time,
every director of the company, who is knowingly party to the default, shall be punishable
with imprisonment which may extent to 2 years and fine which shall not be less than Rs.
1000/- for every day of default. The company shall also be liable to pay simple interest of
18% per annum on the delayed payment for the period of delay.

No offence shall be deemed to have been committed in the following cases, namely–
a) where the dividend could not be paid by reason of the operation of any law;
b) where a shareholder has given such directions to the company, regarding the
payment of dividend which cannot be complied with;
c) when there is dispute regarding the right to receive the dividend ;
d) where the dividend has been lawfully adjusted by the company against any sum
due to it from the shareholders; or
where for any other reason, the failure to pay the dividend or to post the warrant within the
period aforesaid was not due to any default on the part of the company