The restriction that the company law puts on declaration of dividends by companies is that they must be paid only out of profits and after providing for depreciation. Of course, losses, if any of the previous years must be set off before declaring dividend.
However, in exceptional circumstances, the Government has the power to exempt a company or a class of companies from the provision of providing depreciation before declaration of dividend. The purpose of imposing this restriction is to ensure that the assets of companies are preserved for the benefit of their creditors and not to be distributed among members of the companies in the guise of dividends.
Payment of Dividend in Cash or in Kind
Dividend can be paid only in cash, not in kind. The articles may provide that any meeting of the company declaring a dividend may resolve that the dividend be paid wholly or partly by distribution or issue of paid-up shares. In the absence of such express authority dividends may not be paid otherwise than in cash. In one case, where the dividend was paid by allotting shares, it was held that the market value of the shares on the date of the declaration of dividend was to be taken into consideration for computing the income of shareholders for the purposes of tax.
Liked this article on When Dividend Is Restricted and have your own input that you would like to share? Comment below and don’t forget to SHARE THIS ARTICLE!
Image Source: glasslewis.com
