Declaration and Payment of Dividend under Companies Law

1. Declaration and Payment of Dividend underCompanies Law taxguru.in/company-law/declaration-payment-dividend-companies-law.html SECTION 123 TO 127 OF COMPANIES ACT, 2013 READ WITH THE COMPANIES (DECLARATION AND PAYMENT OF DIVIDEND) RULES,2014 DIVIDEND- SECTION 2(35) Where in simple words, dividend can be defined as the sum of money paid by acompany, to its shareholders, out of the profits made by a company, if so authorised by its articles, in proportion to the amount paid- up on each share held by them.(Section 51) ‘Dividend’ includes any interimdividend; Under the Companies Act, 2013 (hereinafter referred to as “CA ACT 2013”), Section123 to 127 of Chapter VIII deals with the provisions related to the declaration and payment of dividend. (Note: No company shall declare dividend unless carried over previous lossesand depreciation not provided in previous year or years are set off against profit of the company for the currentyear.) (Note: In case of, Inadequacy of Profits resulting declaration of dividend outof previous year undistributed profits: –

2. 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 previousyears and transferred by the company to the reserves, such declaration of dividend shall not be made except in accordance with Rule 3 of Companies (Declaration and Paymentof Dividend) Rules,2014.) RULE 3 OF COMPANIES (DECLARATION AND PAYMENT OF DIVIDEND) RULES, 2014: DECLARATION OF DIVIDEND OUT OFRESERVES In the event of inadequacy or absence of profits in any year, a company may declare dividend out of free reserves subject to the fulfilment of the following conditions,namely: The rate of dividend declared shall not exceed the average of the rates atwhich dividend was declared by it in the three years immediately preceding thatyear: Provided that this sub-rule shall not apply to a company, which has not declaredany dividend in each of the three preceding financial year. The total amount to be drawn from such accumulated profits shall not exceed one- tenth of the sum of its paid-up share capital and free reserves as appearing in thelatest audited financialstatement. The amount so drawn shall first be utilised to set off the losses incurred in thefinancial year in which dividend is declared before any dividend in respect of equity shares is declared. The balance of reserves after such withdrawal shall not fall below fifteen per cent ofits paid-up share capital as appearing in the latest audited financialstatement. The amount of the dividend, including interim dividend, shall be deposited in ascheduled bank in a separate account within five days from the date of declaration of suchdividend PAYMENT OFDIVIDEND No dividend shall be payable except by way of cash, where dividend payable in cash can also be paid through cheque, warrant or in any electronic mode, to the shareholder whois entitled to thedividend. Condition: – A company who has committed any default in compliance with theprovisions of section 73 and 74 relating to the acceptance and repayment of deposits would be barred to declaredividend. INTERIM DIVIDEND- SECTION123(3) Board of directors of a company may declare interim dividend during any financial yearor at any time during the period from closure of financial year till holding of the annual general meeting, out of the profits made by the company during such financial year orout of previous year undistributed profits (subject to Companies (Declaration and Payment of Dividend) Rules,2014).

3. In case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, suchinterim dividend shall not be declared at a rate higher than the average dividends declared bythe company during the immediately preceding three financialyears.] Note: As per Section- 2(35) “dividend includes interim dividend” signifies thatthe provisions of Companies Act 2013, applicable to the final dividend to theextent possible, shall also applicable on interimdividend. PROCEDURE OF DECLARATION AND PAYMENT OFDIVIDEND Issue atleast 7 clear days notice of the meeting of Board of directors. (In case of listed companies, notify stock exchange(s) where the securities of the company are listed, at least 2 working days in advance of the date of the meeting as per regulation 29 ofSEBI (LODR) Regulations, 2015) ⇓ Hold Board meeting and pass resolution for recommending the final amount ofdividend. *Listed companies are required to give atleast 7 daysnotice of Book closure tostock exchange as per regulation 42 of SEBI(LODR) Regulations2015. ⇓ Close the register of members and the share transfer register of thecompany ⇓ Hold a Board/committee meeting for approving registration of transfer/ transmission ofthe shares of the company, which have been lodged with the company prior to the commencement of bookclosure. *The listed entity shall declare recommend or declare all dividend atleast 5 workingdays before the record date fixed for thepurpose. ⇓ Hold the annual general meeting and pass an ordinary resolution declaring thepayment of dividend to the shareholders of the company as per recommendation of theBoard. *In case of Interim dividend, it is not mandatory to take approval of shareholders for declaration of Dividend, the Board may declare it in the Board meeting-section123(3)). ⇓ Prepare a statement of dividend in respect of each shareholder and it must beensured that the dividend tax is paid to the tax authorities within the prescribedtime. ⇓

4. Separate Bank Account is required to be opened and amount of dividend payableshall be credited to the said account within 5 days ofdeclaration. * If the company is listed, then for payment of dividend it has to mandatorily use, either directly or through its Registrars to an Issue and Share Transfer Agents (RTI & STA), any Reserve Bank of India approved electronic mode of payment such as Electronic Clearing Services (ECS), National Electronic Fund Transfer (NEFT), etc. *Provided that where it is not possible to use electronic mode of payment,‘payable-at-par’ warrants or cheques may be issued but where the amount payable as dividend exceeds one thousand and five hundred rupees, the ‘payable-at-par’ warrants or cheques shall be sent by speed post (Regulation 12 of SEBI (LODR) Regulations2015). ⇓ Make arrangements with the bank and in collaboration with other banks if required,for payment of the Dividend Warrants atpar. ⇓ Dispatch dividend warrants within thirty days of the declaration of dividend. In caseof joint shareholders, dispatch the dividend warrant to the first namedshareholder. ⇓ In case dividend remaining unpaid or unclaimed, Company is required to arrange for transfer of unpaid or unclaimed dividend to a special account named “Unpaiddividend Account” within 7 days after expiry of the period of 30 days of declaration of final dividend. (Section124). ⇓ Transfer unpaid dividend amount to Investor Education and Protection Fund (IEPF)after the expiry of seven years from the date of transfer to unpaid dividendA/c. EXAMPLE 1: ABC Private Limited, a domestic company declared an interim dividendof Rs. 15,00,000 in its Board meeting held on 19.03.2020 to be paid to the shareholdersof the company. what are the applicable provisions as per the companies Act and Income taxAct? AS PER COMPANIES ACT,2013 The company is required to deposit the amount of dividend so declared within 5 days from the date of declaration of Dividend i.e. 19.03.2020 (up to 23.03.2020) Further, the company is required to make the payment within 30 days ofdeclaration of dividend (up to 17.04.2020), failing which company will be liable to pay interest @18% p.a. for the period of default. Moreover, it is required to deposit the unpaid dividend amount in the special account within 7 days from expiry of 30 days(i.e. 23.04.2020).

5. AS PER INCOME TAX ACT,1961 The company is liable to pay tax on dividend, known as Dividend DistributionTax (DDT)or Corporate Dividend Tax (CDT) at an effective rate of 20.555% (Basis rate 15% including surcharge (12%) and cess (4%)) (Refer Section 115O of the Income taxAct) In this Case, DDT to be paid by the companyis: 15,00,000*20.555%=3,08,325 *Note: The amount of dividend of Rs 5,00,000 (in excess of Rs 10 lakh) is taxable inthe hands of shareholder at a rate of 10% (section 115BBDA). (This provision is not applicable in case shareholder is a company or religious or charitabletrust) The amount of DDT as calculated above shall be deposited with theCentral Government within 14 days from the dateof: declaration of any dividend;or distribution of any dividend;or payment of anydividend, whichever isearliest. In this case, it must be paid maximum by 01.04.2020, failing which company willbe liable to pay by way of interest at the rate of 1% of the DDT from the date following the date on which such DDT was payable till the time such DDT is actually paidto thegovernment. (*Note: Dividend amount of Rs 10,00,000 is fully exempt in the hands of shareholder. Provided, if the dividend amount exceeds Rs 10 lakh, then the amount in excess of Rs10 Lakh shall be taxable in the hands of shareholder at a special rate of 10% (Refer Section 115BBDA) EXAMPLE 2: ABC Private limited, a domestic company declared a final dividend ofRs. 10,00,000 in its Annual general meeting held on 30.09.2020 to be paid to the shareholders of the company. what are the applicable provisions as per the companies Act and Income taxAct? AS PER COMPANIES ACT,2013 The company is required to deposit the amount of dividend so declared within5 days from the date of declaration of Dividend i.e. 30.09.2020 (up to04.10.2020)

6. Further, the company is required to make the payment within 30 days ofdeclaration of dividend (up to 29.10.2020), failing which company will be liable to pay interest @18% p.a. for the period of default. Moreover, it is required to deposit the unpaid dividend amount in the special account within 7 days from expiry of 30 days(i.e. 05.11.2020). AS PER INCOME TAX ACT,1961 As per Union Budget 2020, DDT will not be required to be made (under section115- O of the Act) from Assessment Year (‘AY’) 2021-22 relevant to Financial Year (‘FY’) 2020-21, on dividends declared, distributed or paid by domestic companies to shareholders; Section 115BBDA which taxes dividend income in excess of Rs. 10 lakhs inthe hands of shareholders at 10% shall not be applicable and consequentially the dividend income will be taxable based on the shareholders taxbrackets; Deduction will be allowed under section 57 of the Act in respect of interestexpense and such deduction shall not exceed 20% of the dividendincome; The domestic company declaring dividend will be required to withhold tax on resident payees at 10% (under section 194) where dividend is paid in excess ofRs. 5,000 to a shareholder and non-resident payees at the rate of 20% or asmentioned in the Double taxation avoidance agreement (‘DTAA’), whichever islower; CONCLUSION: Now the shareholders will be liable to pay tax on the dividend incomeas per their normal taxrate.

8. – EXCEPTIONS- In the following cases, no offence shall be deemed to havebeen committed where the dividend could not be paid by reason of the operation of anylaw; where a shareholder has given directions to the company regarding the paymentof the dividend and those directions cannot be complied with and the same has been communicated tohim; where there is a dispute regarding the right to receive thedividend; where the dividend has been lawfully adjusted by the company against any sumdue to it from the shareholder;or where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of thecompany.

9. (The article has been prepared with contribution of Kritika sharma and Rajivsharma the team members of Tarun Jain &Associates.)