As per Sec 123 which deals with deceleration of dividend and corresponding rules
1. If dividend is being paid out of CY profits (that means company is in good financial position) then have to adjust all past losses including past depreciation (that means loss after depreciation). In old company act it was written to adjust past loss or depreciation whichever is lower, now such thing is removed.
2. Further if dividend is paid out of general reserve then (that means company is not in good financial position) then they have to adjust only current year losses if any before declaring dividend.
i hope hope above explanation has solved your doubts if not reply back
Thank you Sir, Understood.
Wants to take an e.g. for more clarity.
Suppose position of a Company as at March’2017 is as follow:
Balance in reserve & surplus of Rs. (5 Crore) negative losses only.
Profit for current FY 2016-17 is Rs. 1 Crore positive.
So now, as per section 123, after set off past year’s losses and depreciation profit/reserve would become Rs. (4 Crore) negative.
If now the company wants to declare the dividend, what will be the max amount of dividend can be declared as per the Rule 3?
Now in this case , company will have to give dividend out of general reserves and in such case, they need to adjust only current year losses.
In this case they will have to use general reserves and no need to adjust anything as there are no current year losses.