ABC Ltd., a listed company in the Indian manufacturing sector, has concluded its financial year ended 31st March 2025. The company is now…

CA Intermediate · Corporate and Other Laws · PYQS · January 2026
ABC Ltd., a listed company in the Indian manufacturing sector, has concluded its financial year ended 31st March 2025. The company is now considering declaring a final dividend of 3 per equity share, with a face value of 10 per share. Before proceeding, the Board of Directors seeks to ensure that the proposed dividend complies with all relevant provisions of the Companies Act, 2013, particularly those related to the permissible sources and conditions for dividend distribution. The summarized financial position of the company for FY 2024-25 is as follows: Revenue from operations amounts to 10,000 lakhs, andOther income contributes an additional - 1,000 lakhs, bringing the total income to 11,000 lakhs.The company has incurred expenses (excluding depreciation) of 8,000 lakhs, and Provided for depreciation of 1,200 lakhs, as per Schedule II of the Companies Act.The resulting profit before tax (PBT) stands at 1,800 lakhs, with a tax provision of 450 lakhs, leading to a net profit after tax (PAT) of 1,350 lakhs. In addition to current year earnings, ABC Ltd. has accumulated retained earnings of 2,000 lakhs from previous financial years and holds free reserves (excluding any revaluation reserves) of 500 lakhs. The company has 100 lakh equity shares and the total proposed dividend pay-out amounts to 300 lakhs (i.e.,3 per share). Based on the above information, analyse whether ABC Ltd. is eligible to declare dividends under the following scenarios in compliance with the Companies Act, 2013: (1) Out of the current year's profits. (2) Out of the accumulated profits of previous years only.

Suggested Answer and Working Notes:

According to Section 123 (1) (a) of the Companies Act, 2013, no dividend shall be declared or paid by a company for any financial year except: (i) out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of Schedule II, or (ii) out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or (iii) out of both. As per the third proviso of the above sub-section, where, owing to inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the free reserves, such declaration of dividend shall not be made except in accordance with such rules as may be prescribed in this behalf: Provided also that no dividend shall be declared or paid by a company from its reserves other than free reserves. As per the facts of the questions and the provisions of the Companies Act, 2013: (1) In terms of the provision of Section 123 (1) (a), ABC Limited has adequate profits in the current year (₹ 1,350 lakhs) after providing for depreciation, to pay the proposed dividend of 300lakhs. Hence, the Company is eligible to pay the requisite dividend out of current year profits. (2) In terms of the same provision of Section 123 (1) (a), the Company can also utilise its past accumulated retained earnings of 2,000 lakhs and free reserves of 500lakhs from previous financial years for declaring dividends of 300lakhs even without utilising its current year's profits provided that depreciation has been appropriately accounted for, and since the current year's profits are not inadequate, the above proviso will not be applicable. Hence, the Company is eligible to pay the requisite dividend out of accumulated profits and reserves of the previous financial years.

Topics: Declaration and Payment of Dividend

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic