1.50     Query

Distribution of profit under Section 104.

 There is a debit balance of Rs. 60,000 in the books of a private limited subsidiary company (wholly owned by the holding company) after passing all entries, particularly, after debiting Rs. 1,00,000 loss on sale of investments (being loss on sale of shares by the subsidiary company to the holding company).  As per Section 104 read with Section 109 of the Indian Income-tax Act, 1961 this company has to distribute 90% of the distributable income as dividend.  The distributable income is to be reduced by loss under the head capital gains relating to capital assets other than short-term capital assets as per Section 109 (1) (o).  However, capital gains on transfer of capital asset by a subsidiary company to the holding company shall not apply as per Section 47 (v) and Section 45.

There is no carried forward balance in the profit and loss account or in the general reserve.

Under the above circumstances, is the company liable to pay dividend i.e. 90% of Rs. 40,000 (after taking account of Rs. 1,00,000 being loss on sale of investments by the subsidiary company to the holding company, even though there is a debit balance of Rs. 60,000 in the Profit and Loss Account)?

                                                                       Opinion                                     September 25, 1978

 The Committee is of the opinion that the company concerned cannot be required to distribute dividend, because such a distribution will contravene the provisions of Section 205 of the Companies Act, 1956 in view of the loss under the factual circumstances of the case.

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