DIVISIBLE PROFIT AND DIVIDEND

MEANING
DIVIDEND:
It is a payment made by a company to its shareholders.

DIVISIBLE PROFIT:
The portion of the profit which can legally be distributed to the
shareholder of the company by the way of dividend is called divisible
profit.
 TYPES OF DIVIDEND
Dividend payable on the basis of time Dividend payable on the basis of
nature of shares
• Interim Dividend: When Board • Equity Shares
of Directors declare dividend • Preference Shares
between two Annual General
Meeting of the company.
• Final Dividend: When paid for
any financial year, after the end
of that financial year.
 Declaration of Dividend (Section
123)
• Dividend shall be declared or paid by a company for any financial year only.
• Declaration of Dividend out of accumulated profits.
• Declaration of Dividend by set off of previous losses and depreciation
against the profit of the company for the current year.
• In case of insufficient profits, interim dividend to be paid cannot be more
than an average of last 3 years.
• After declaration of dividend, it has to be deposited in bank account within
5 days.
• If dividend is not claimed by shareholder within 7 days, then the amount
has to be transferred to IEPF (Investor Education and Protector Fund
Authority)
• If dividend is not claimed by shareholders within 30 days then it has to be
deposited in special account opened with scheduled bank within 7 days.
 DIFFERENCE BETWEEN INTERIM AND FINAL DIVIDEND

Interim Dividend Final Dividend

• It is paid at any time, during the year mostly on • Paid after the end of the year, taking into
the basis of first six months. account the audited accounts of the whole
• It is decided by Board of directors (AGM year.
approval not required) • Recommended by BOD, approved by AGM.
• BOD must be authorized by AOA • AOA authorization is not required.
• If the profits are high, directors can decide • After the audit of accounts of the year, based
during the year (Audit is not required) on profits, it can be recommended.
• Mostly, the rate of dividend is less • Higher than Interim Dividend
• No liability of the company arises in unfavorable
• After AGM approval, it becomes liability of the
conditions. It can be cancelled.
company and hence cannot be cancelled. It
• If after distributing interim dividend, the has to be paid out.
company suffers loss in remaining part of the
year, it amounts to payment of dividend out of • As final dividend is paid by complying with the
capital, which is illegal. Hence, directors become provisions of Companies Act, after the audit of
personally liable. accounts, no special liability of directors arise.
Difference Between Profit and Divisible Profit
PROFIT DIVISIBLE PROFIT

• Generally the excess of business income over • The profit which is available for distribution
business expenditure is taken to be profit. of dividend is known as divisible profit.
• The profit is ascertained on the basis of • It is on the basis of provision of MOA and
generally accepted accounting principles and AOA and also the legal decision of the matter.
the provisions of the Companies Act.
• Divisible profit will be given from surplus, not
• In Profit Accounting Principle, Capital Revenue
from capital profit.
expenses allocation and effect of adjustment is
necessary.
• All profits cannot be distributed as dividend. • The profit which is legally shown after
depreciation, capital loss and revenue loss
written off, is used for giving dividend
• Provision of AOA may or may not be
calculated on calculation of profit. • Provision of AOA regarding divisible profit are
of paramount importance.
• Divisible Profit is included in profit as it is a
wider term. • Divisible profit is limited.
 Capital Profit
The profit arises from sale of fixed assets or arises due to revaluation of assets
is known as capital profit.

Sources of Capital profit:

1. Profit on sale of fixed assets
2. Profit prior to incorporation
3. Premium received on issue of shares or debentures
4. Profit on redemption of debentures at a discount
5. Profit on revaluation of assets
6. Profit from non trading activities or non recurring income.
 Divisible Profit
Foster v. The New Trinidad Lake Asphalte Co. ltd. (1901)
In this case, New Trinidad Lake Asphalte co. ltd. Purchased the business of another company. The
assets taken over by the company included debt amounting to 1,00,000 dollars. At the time of
purchase it was considered as irrevocable but later on the whole amount was paid by the debtors
with interest. The directors decided to distribute the amount so realized, threatening it to be a
profit. The debenture holder and shareholders brought an action against the director in court
requesting to issue an injunction against the directors prohibiting them from distributing the
capital profits. Justice Byrne in his judgement held that such capital profits can be distributed if
the following conditions are fulfilled:
• All other assets have been revaluated
• Such profits have been actually realized in cash
• AOA permits the distribution of such capital profits.
 Auditor’s Duty regarding Divisible Profit

• Auditor should see the divisible profits has been ascertained on the basis of legal provision,
accounting principles and provision of Companies Act.
• Dividend is paid out of profits and generally it is paid out of revenue profit and not out of capital
profit.
• If capital profit is to be utilized in payment of dividend, then he should consider the condition laid
down in Foster v. New Trinidad Case
• No dividend can be declared without paying providing for depreciation on fixed assets as per the
section 205 of the Act.
• The arrears of depreciation of past years must be provided for out of the current year’s profit and
the surplus can only be utilized for payment of dividend.
• If there are past losses or the actual depreciation written off must be set off against the current
year’s profit before declaring dividend.
• Auditor should see that the proper amount of profit or certain percentage of profit is transfer to
reserve for future contingencies or not.
• The auditor should check that the dividend is cleared out of the truth profits of the company and
shareholder’s capital is not used for the purpose.
THANK YOU