3.3    Query :   Declaration of dividend as per the provisions of section 205 of the Companies Act, 1956.

1. The querist is engaged in the manufacture of alloy iron and steel castings. The share capital of the company consists of:

                        (a) 16,212 fully paid up equity shares of Rs. 100/- each.

(b) 3000 fully paid up, 13.5% redeemable cumulative preference shares of Rs. 100/- each.

2. The querist has stated that due to various reasons the company suffered huge losses during the period between May, 1985 (when it commenced production) and March, 1990. The details of loss, as per the querist, are as follows:

                                                                                                (figures in lakh Rs.)

* Rs. 16/- Profit (Rs. sixteen only)

3. The querist has further stated that the company made a very sound recovery during 1990-91 due to rehabilitation package put forward by the institutions and banks under a scheme. The querist contemplates that the trend for the year 1991-92 is equally encouraging and the company hopes to end the year with a profit of around Rs 75.00 lakhs, after providing for depreciation.

4. The querist has sought the opinion of the Expert Advisory Committee on the following issue:

Whether the company can declare dividend as per section 205(1)(b) of the Companies Act, 1956, assuming that the audited result will not be in variance with the provisional profit of Rs. 75.00 lakhs for the year ended 31.3.1992.

                                                                            Opinion                                       October 7, 1992

1.  The Committee notes that section 205(1) of the Companies Act, 1956, provides,  inter alia, as follows:

“205(1) No dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2) or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with those provisions and remaining undistributed or out of both or out of moneys provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government:

                        Provided that-

                        (a)            …..

(b) if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960, then the amount of the loss or an amount which is 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 the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation in accordance with the provisions of sub-section (2) or against both.”

2. Since it is not clear from the query whether the depreciation provided by the company is in accordance with the provisions of section 205(2) of the Companies Act, 1956, the Committee presumes that the depreciation as stated by the querist is as per the requirements of the Companies Act in this regard.

3. The Committee is of the opinion that if the company is able to earn target profits (post-depreciation and tax) of Rs. 75 lakh, it would be left with a distributable surplus, as per the present legal position under Section 205(1)(b) of the Companies Act, 1956. Accordingly, dividends could be paid out of these profits. The Committee is, however, of the view that it would not be financially prudent to do so since the past losses caused by expenses other than the past depreciation would not be set-off and if the dividends are paid without fully setting-off past losses, it would be payment of dividend out of capital.

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