Divisible profits are those profits which are arrived at after deducting all the expenses including the taxes payable to the s tate by the company. It is very difficult to define the term divisible profit but some general principles are to be followed to decide the divisible profits:-
- The provisions of section 205 of the companies act should be complied with.
- Before determining divisible profits due provision should be made for income tax.
- Dividends are recommended by the directors but are finally approved by the shareholders in the general meetings.
Difference between profit and divisible profit must be clearly understood. All the profits are not divisible. Only those profits, which can be legally distributed amongst the shareholders are divisible profits. Divisible profits should be ascertained having regard to the provisions of section 205 of the companies act and in each the provisions of memorandum and articles of association and their validity must be considered. Dividend must also not be paid so as to deprive the creditors or debenture holders of their security.
DISTRIBUTION OF DIVIDEND (DIVISIBLE PROFIT)
- Dividend can be distributed out of the profits of the company.
- The capital of the shareholders should in no case be used for the purpose of distribution as dividends.
- The companies act does not lay down that the capital should remain intact but the law does not permit any part of the capital to be returned to shareholders in the form of dividends or otherwise.
- Depreciation on fixed assets must be provided as per section 205 before computing divisible profits.
- A company may pay dividends out of the profits of the current year without making good a loss of fixed capital provided there are sufficient assets to pay off liabilities.
- Depreciation on floating assets must also be provided before computing divisible profits.
- Dividend may also be paid out of the profits of the previous years.
- A company may distribute capital profits if (a) It is permitted by the articles of the company. (b) Such capital profits have been actually realized. (c) If the surplus remains after the revaluation of all the other assets.
- A company can not pay dividends if the security of the creditors is doubted in any way.
- All those auditors and directors who are parties to the improper payment of a dividend are criminally liable, but if they acted honestly and bona fide, they are not guilty.
- A company need not distribute the whole of the profits amongst its shareholders.
VOUCHING OF DIVIDEND PAID
- Vouching of dividend paid to the shareholders of the company must begin with checking of the authority and legality of dividend declaration. Declaration and payment of dividends is based on a decision and authorization by the board of directors as recorded in the minutes of its meeting. The authorization itself has to be according to the law governing declaration of dividends.
- The amount of dividend must be checked with the rate of dividend and the number of shareholders as in the register of members from which the dividend list is drawn.
- The actual payment should be checked from the counter folio of chques issued and the bank statements.
- The auditor should carefully review the sources of dividend. If dividend has been paid from sources other than retained earnings, it should be ascertained whether the same is permissible under the relevant provisions of companies act.
- If a dividend remains unpaid or unclaimed withing 42 days of its declaration, the company must deposit the said amount within the next seven days in a special account in a schedule bank.
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