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CA Intermediate · Corporate and Other Laws · Declaration and Payment of Dividend

Ananya Foods Ltd's board proposes to declare dividend for the current year. The company has not provided for depreciation for the year, though it has distributable profit before depreciation. A director asks whether dividend can be declared. What is the correct position?

Dividend cannot be declared until depreciation for the year has been provided for. The Act permits dividend only out of profits arrived at after providing for depreciation, so postponing depreciation to later years or seeking Registrar approval does not make the declaration valid.

  1. ADividend cannot be declared until depreciation for the year is provided for, as dividend is declared only after providing for depreciationCorrect
  2. BDividend can be declared first and depreciation provided later from the next year's profits
  3. CDepreciation is irrelevant to dividend declaration
  4. DDividend can be declared if the Registrar gives permission

Explanation

Under the Act, a company may declare dividend for a financial year only out of profits of that year arrived at after providing for depreciation as per the Act, or out of profits of previous years after depreciation, or out of money provided by the government. Therefore depreciation must be provided before dividend is declared; it cannot be postponed and no Registrar permission substitutes for it.

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