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CS Executive · Company Law and Practice · Distribution of Profits

Mehra Engineering Ltd has made a profit this year, but it has carried-over losses and depreciation not provided for in previous years. Its directors wish to declare dividend from current year profit without adjusting them. Which statement is correct under section 123?

Dividend cannot be declared until previous carried-over losses and depreciation not provided in earlier years have been set off against the current year's profit. Transferring profit to reserves or limiting payment to certain shareholders does not remove this condition.

  1. ADividend may be declared if the Board transfers some profit to reserves first
  2. BDividend may be declared if it is paid only to equity shareholders
  3. CDividend may be declared out of revaluation gains of assets
  4. DDividend cannot be declared unless the carried-over losses and unprovided depreciation are set off against current year profitCorrect

Explanation

A proviso to section 123(1) bars any dividend unless carried-over previous losses and depreciation not provided in earlier years are set off against the current year profit. A transfer to reserves is permitted but does not remove this requirement. Revaluation gains are excluded when computing profits.

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