Dividends ‑ Declaration of ‑ Transfer to reserves of certain percentage of profits - Companies Law - Circular: No. 8/76

Circular: No. 8/76 [1/1/76 ‑ CL ‑ V], dated 18 ‑ 5 ‑ 1976 read with 12/76 [1/1/76- CL ‑ V], dated 10 ‑ 6 ‑ 1976. Subject:- Dividends ‑ Declaration of ‑ Transfer to reserves of certain percentage of profits ‑ Queries arising from the Companies (Transfer of Profits to Reserves) Rules, 1975 and the Companies (Declaration of Dividend out of Reserves) Rules, 1975 answered The Department has received a number of queries in respect of the above‑mentioned rules. The points raised have been duly considered and the Department s views thereon are indicated below: Query 1: Whether arrears of depreciation mentioned in sub‑section (1) of section 205 should also be provided before arriving at the profits for the purpose of transfer of specified percentage thereof to reserve in terms of rule 2 of the Transfer of Profits to Reserves Rules? Answer: Yes, arrears of depreciation mentioned in sub‑section (1) should also be provided. Query 2: Whether the term current profits used in rule 2 refers to profits after tax or before tax? Answer: It refers to profits after tax. Query 3: Whether the profits transferred to development rebate reserve should be excluded in working out current profits for ascertaining the amount to be transferred to reserves under the rules? Answer: The current profits mean profits after statutory transfer to the development rebate reserve. Query 4: Whether reference to dividend made in the rules is to both equity and preference dividend or to equity dividend alone? Answer: The reference is to equity dividend and also to that portion of dividend relating to participating preference shares over and above the fixed rate of preference dividend. Query 5: Whether transfer to development rebate reserve, capital reserve or special reserve will meet the requirement of transfer to reserves under the rules? Answer: The reply is in the negative. Query 6: Whether in case the proposed dividend is less than 10 per cent, is it necessary to transfer any amount to reserves under the rules? Answer: No amount is required to be transferred to reserves in such cases. Query 7: Whether a company can transfer to reserves a higher percentage of its dividend than that applicable to the proposed dividend slab such transfer being of less than 10 per cent of its current profits? Answer: The reply is in the affirmative. Query 8: Whether for the purposes of rule 3(i) it is necessary to declare a dividend? Answer: Yes. It is necessary to declare dividend. Query 9: Whether these Rules make the provisions of section 5A of the Companies (Temporary Restrictions on Dividend) Act, 1974 mandatory in certain cases? Answer: Since there is no inconsistency with the provisions of the Companies (Temporary Restrictions on Dividend) Act, the provisions of these Rules will have to be complied with. Query 10: Whether after transfer of 10 per cent of the current profits to reserve, the remaining undistributed profits could be carried forward in the profit and loss account? Answer: The Rules do not prohibit a company from carrying forward any balance of current profit and loss account without transferring them to reserves. Query 11: Whether for working out of the average rate of dividends for the purpose of rule 2(1), no dividend years should be excluded? Answer: The reply is in the negative.