Divisible Profit

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Divisible Profit

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  • Divisible Profit

    1. 1. Divisible profit By Prof. L.Augustin Amaladas M.com.,AICWA.,B.Ed.,PGDFM
    2. 2. coverage <ul><li>Meaning of profit </li></ul><ul><li>Types of profit </li></ul><ul><li>Divisible profit-meaning </li></ul><ul><li>Reserve and provision </li></ul><ul><li>Capital profit and revenue profits </li></ul><ul><li>Types of revenue profit </li></ul><ul><li>Types of capital profit </li></ul><ul><li>Types of dividend </li></ul><ul><li>Bonus shares </li></ul><ul><li>Redemption of preference shares </li></ul><ul><li>Buyback of shares </li></ul>
    3. 3. Continuation <ul><li>Statutory reserves </li></ul><ul><li>How to use reserve for dividend-restrictions </li></ul><ul><li>Income tax point of view </li></ul><ul><li>TDS </li></ul><ul><li>Procedure of declaration of dividend </li></ul><ul><li>Unpaid dividend </li></ul><ul><li>Investors Education and protection fund </li></ul><ul><li>Interim dividend </li></ul><ul><li>Final dividend </li></ul>
    4. 4. Meaning of profit <ul><li>Revenue-Cost </li></ul><ul><li>Asset-liabilities and capital </li></ul><ul><li>Income – expenditure </li></ul><ul><li>Meaning of income </li></ul><ul><li>Meaning of expenditure </li></ul><ul><li>Capital exp VS revenue expenditure </li></ul><ul><li>Capital income VS Revenue income </li></ul>
    5. 5. Types of profit <ul><li>Gross profit </li></ul><ul><li>Net profit </li></ul><ul><li>Profit before tax </li></ul><ul><li>Operating profit </li></ul><ul><li>Non operating profit </li></ul><ul><li>Profit before Interest and dividend(PBIT) </li></ul><ul><li>Profit after interest and TAx(PAIT) </li></ul><ul><li>Capital profit </li></ul><ul><li>Revenue profit </li></ul><ul><li>Profit after depreciation </li></ul>
    6. 6. Divisible profit-meaning <ul><li>Profit after adequate depreciation[Sec.205(2)] </li></ul><ul><li>Profit after interest-depreciation of the current year- Depreciation of the previous year- loss of the previous year </li></ul><ul><li>Depreciation as per Schedule XIV of the Companies Act </li></ul><ul><li>Section 350 –calculated on WDV </li></ul>
    7. 7. Depreciation <ul><li>Accounting Standard-06 </li></ul><ul><li>Depreciation on Fixed assets </li></ul><ul><li>Depreciation on circulating asset is compulsory ie Cost or market price whichever is lower. </li></ul>
    8. 8. Calculation of Dividend <ul><li>On paid up capital in the absence of any indication to the contrary in the AOA </li></ul><ul><li>Preference share holders should be paid first. </li></ul>
    9. 9. Interim dividend <ul><li>Section 2(14A) of companies Act defines dividend to include interim dividend </li></ul><ul><li>Regulation 85 of Table A </li></ul><ul><li>The rules applicable to final dividend is also applicable[205(1A)] </li></ul><ul><li>Directors declare dividend </li></ul><ul><li>Amount to be deposited to a separate account once dividend declared with in 5 days from the date of declaration of dividend </li></ul><ul><li>All the provisions sections 205(1), 205A, 205C, </li></ul><ul><li>206, 206A 207 shall be applicable. </li></ul>
    10. 10. Final dividend <ul><li>Rate-Recommendation made by BOD </li></ul><ul><li>Declared by Shareholders in the shareholders’ meeting </li></ul><ul><li>Arrears of dividend to preference shareholders is treated as contingent liability. </li></ul><ul><li>Right to receive dividend happens only when declared by the shareholders in the general meeting. </li></ul>
    11. 11. Final dividend-continue <ul><li>Dividend can be declared even in the subsequent extra ordinary meeting. </li></ul><ul><li>Court will not interfere with respect to the quantum of dividend. It is the internal matter of the directors to decide the rate and shareholders approve it. </li></ul>
    12. 12. Legal provisions <ul><li>1. Resolution in the General meeting: </li></ul><ul><ul><ul><li>Shareholders themselves can not declared dividend </li></ul></ul></ul><ul><ul><ul><li>217 indicates that the directors are required to state in their report the amount which they recommend. </li></ul></ul></ul>
    13. 13. 2. Dividend in proportion to paid up (Section 93) <ul><li>If authorised by articles- on paid up share capital </li></ul><ul><li>If not authorised – on nominal value </li></ul><ul><li>Case law:- Oak bank oil co.VS Crum </li></ul>
    14. 14. 3.Dividend out of profits <ul><li>Sec.205(2)-The current revenue profit after depreciation </li></ul><ul><li>Section 205(1)-Profits of the previous year </li></ul><ul><li>Out of both </li></ul><ul><li>Money provided by the Central government if guarantee given </li></ul><ul><li>#dividend can be declared if permitted by Central Government without providing depreciation. </li></ul>
    15. 15. The Cardinal principle <ul><li>Dividend can be declared out of profits otherwise amount to a breach of trust. </li></ul><ul><li>If paid without profit Directors are joint and severally liable. </li></ul><ul><li>Case law:Exchange banking Company Flitoroft -debt becomes bad shown as asset without deducting bad debt from profit. </li></ul>
    16. 16. 4. Dividend includes interim dividend <ul><li>Section 2(14A) of companies Act defines dividend to include interim dividend </li></ul><ul><li>Regulation 85 of Table A </li></ul><ul><li>The rules applicable to final dividend is also applicable[205(1A)] </li></ul><ul><li>Directors declare dividend </li></ul><ul><li>Amount to be deposited to a separate account once dividend declared with in 5 days from the date of declaration of dividend </li></ul><ul><li>All the provisions sections 205(1), 205A, 205C, </li></ul><ul><li>206, 206A 207 shall be applicable. </li></ul>
    17. 17. 5.Transfer to reserve <ul><li>Section 205(2A)-upto 10% </li></ul><ul><li>Rate of dividend % of profit to reserve </li></ul><ul><li>10%-12.5% 2.5% </li></ul><ul><li>12.5%-15% 5.0% </li></ul><ul><li>15%-20% 7.5% </li></ul><ul><li>20% and above 10% </li></ul>
    18. 18. 6. Dividend out reserves <ul><li>Section 205-A(3)-comply with rules framed by Central Government. </li></ul>
    19. 19. 7.Dividend payable only in cash <ul><li>Section 205(3)-Cash or cheque or dividend Warrant </li></ul><ul><li>Posted to the registered address of the shareholders. </li></ul><ul><li>Joint holders-to the first name on the register. </li></ul>
    20. 20. 8.Compliance with provisions of Section 80-A <ul><li>It is related to redemption of irredeemable preference shares </li></ul><ul><li>If such shares are not redeemed it can not declare dividend </li></ul>
    21. 21. 9.Unpaid dividend <ul><li>Section 205A(1)If dividend not paid /not claimed within 30 days It should be transferred to the unpaid dividend account within 7 days after the expiry of 30 days from the date of declaration of dividend. </li></ul><ul><li>Penalty:Sec.205A(4):1. Penalty to directors </li></ul><ul><li>2. 12% interest per annum to such members payable by the company </li></ul>
    22. 22. 10.Transfer to investor Education and protection fund <ul><li>Sec.205A(5): After 7 years from the date of transfer to unclaimed account </li></ul>
    23. 23. 11.Receipt from Central government for transfer <ul><li>Receipt has to be obtained </li></ul><ul><li>Penalty: Sec.205A(8):Rs.5000 for every day of default. </li></ul>
    24. 24. 12.Claim from IEPF <ul><li>No claim is allowed[Sec.205C] </li></ul>
    25. 25. 13. Payment of dividend to registered shareholder <ul><li>To the registered shareholder/order/his banker </li></ul><ul><li>Shareholder can give direction to pay to the banker[Sec.206] </li></ul>
    26. 26. 14.Right to dividend, right shares and bonus shares <ul><li>To the transferee if mandate given bt transferor </li></ul><ul><li>In the absence of such mandate by transferor company has to transfer to unpaid dividend account and keep abayance till the title to shares decided. </li></ul>
    27. 27. 15.Penalty <ul><li>Sec.207 : if not paid within 30 days </li></ul><ul><li>Every director-imprisonment upto-3 years </li></ul><ul><li>Fine to directors: -1000 per day of default </li></ul><ul><li>The company has to pay Simple interest-18%pa during such default. </li></ul>
    28. 28. Special circumstances to pay dividend within 42 days <ul><li>A) By reason of operation of law </li></ul><ul><li>B) the direction of share holders cannot be complied with </li></ul><ul><li>C) dispute to receive dividend </li></ul><ul><li>d) adjust dividend with claims with shareholder </li></ul><ul><li>E) not a fault of the company </li></ul>
    29. 29. Investors Education and protection fund(205C) <ul><li>It is applicable to interim dividend </li></ul><ul><li>It consists of: </li></ul><ul><li>Unpaid dividend </li></ul><ul><li>The application money received for allotment of securities </li></ul><ul><li>Matured deposits with companies </li></ul><ul><li>Matured debentures with companies </li></ul><ul><li>Interest accrued to the account </li></ul><ul><li>Grants and donation to the fund </li></ul><ul><li>Interest received on investments made </li></ul>
    30. 30. Income tax <ul><li>Dividend received by the assessee from domestic company is exempted u/s 10(34)/(35) </li></ul><ul><li>The payer company has to pay 12.5% as tax. </li></ul><ul><li>Dividend received fromforeign company is taxed </li></ul><ul><li>Dividend includes 2(22) of Income tax Act : </li></ul><ul><li>-RELEASE OF COMPANY ASSET FOR DISTRIBUTION TO SHARE HOLDERS to the extent of divisible profits </li></ul><ul><li>-Distribution of debenture stock, deposit certificates and bonus to preference shareholders </li></ul><ul><li>-distribution on liquidation of company </li></ul><ul><li>-distribution in reduction of capital </li></ul><ul><li>-any payment by way of loan or advance by closely held company to shareholders. </li></ul><ul><li>TDS if dividend declared and paid out side india </li></ul>
    31. 31. Income tax <ul><li>Dividend includes 2(22) of Income tax Act : </li></ul><ul><li>-RELEASE OF COMPANY ASSET FOR DISTRIBUTION TO SHARE HOLDERS to the extent of divisible profits </li></ul><ul><li>-Distribution of debenture stock, deposit certificates and bonus to preference shareholders </li></ul><ul><li>-distribution on liquidation of company </li></ul><ul><li>-distribution in reduction of capital </li></ul><ul><li>-any payment by way of loan or advance by closely held company to shareholders. </li></ul><ul><li>TDS if dividend declared and paid out side india </li></ul>
    32. 32. Income tax <ul><li>Dividend excludes: </li></ul><ul><li>Buy back of shares(77A of companies Act) </li></ul><ul><li>Distribution of shares in the scheme of amalgamation, demerger in accordance with section 2(1B) of IT act. </li></ul>
    33. 33. Capital profits <ul><li>Profit on sale of asset </li></ul><ul><li>Profit on revaluation of asset </li></ul><ul><li>Share premium </li></ul><ul><li>Profit on forfeiture </li></ul><ul><li>Profits prior to incorporation </li></ul><ul><li>Profit on redemption on Debentures </li></ul><ul><li>Capital redemption reserve account </li></ul>
    34. 34. Transfer to reserve <ul><li>Rate of dividend % of profit to </li></ul><ul><ul><ul><ul><ul><li>reserve </li></ul></ul></ul></ul></ul><ul><li>10%-12.5% 2.5% </li></ul><ul><li>12.5%-15% 5.0% </li></ul><ul><li>15%-20% 7.5% </li></ul><ul><li>20% and above 10% </li></ul>
    35. 35. Dividend out of reserve <ul><li>Sec 205(A) </li></ul><ul><li>Rate should not exceed five years average rate of dividend </li></ul><ul><li>Drawn from reserve should not be more than 1/10 of paid up capital </li></ul><ul><li>The reserve withdrawn to be used for set off losses </li></ul><ul><li>Balance of reserve =15% of paid up capital </li></ul>
    36. 36. Questions <ul><li>What is meant by dividend? </li></ul><ul><li>Distinguish between dividend and interest. </li></ul><ul><li>When does a right to claim dividend arise? </li></ul><ul><li>Can dividend be declared in an extraordinary meeting? </li></ul><ul><li>Can interim dividend declared revoked? </li></ul><ul><li>Who declares the rate of dividend? </li></ul><ul><li>Can you declare dividend out of reserves? </li></ul><ul><li>Can dividend declared and paid other than cash? </li></ul><ul><li>What is time limit for payment of dividend? </li></ul><ul><li>Is it compulsory to transfer profit to reserve? </li></ul>
    37. 37. Questions? <ul><li>State the provision for unpaid dividend </li></ul><ul><li>Can company declared dividend out of capital profit? </li></ul><ul><li>What are capital profits? </li></ul><ul><li>Can company declare dividend twice a year other than interim dividend? </li></ul><ul><li>Can company declare dividend without passing resolution in adoption of final accounts </li></ul>

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