Dividends ‑ Declaration of ‑ Transfer to reserves of certain percentage of profits - Companies Law - Letter: No. 6/13/75‑CL‑XIV,

Letter: No. 6/13/75 ‑CL ‑ XIV, dated 7 ‑ 2 ‑ 1976. Subject:- Dividends ‑ Declaration of ‑ Transfer to reserves of certain percentage of profits Query: Rule 2 prescribes that amounts should be transferred to reserves depending on the amount of dividends to be declared. The amount to be transferred is expressed as a percentage of current profits. Neither the Act nor the Rules define current profits . Having regard to the word current used, it would appear that past losses are not to be deducted as required for the computation of net profits under section 349. Further, there is a controversy whether the profit should be the amount before tax or the amount after tax. Having regard to the words profits after tax used in rule 3 in contradistinction to the words current profits used in rule 2 and the ordinary meaning of the words current profits , it would appear that the profits before tax have to be considered as current profits. It is not clear whether items like development rebate reserve written back or adjustments relating to previous years can be taken into account while arriving at current profits. Answer: Sub‑section (2A) of section 205 provides for the declaration or payment by a company of a dividend only after providing for depreciation and after the transfer to the reserves of a percentage of its profits. The profits available for distribution as dividends can only be the profits after tax and not before tax. The expression current profits used in rules 2 and 3 of the Transfer of Profits to Reserves Rules accordingly refers to profits after tax. Further, items like development rebate reserve written back, or adjustments relating to previous years will also have to be taken into account before arriving at the current profits for the purpose of the said Rules.