Companies Act, 1956 (the Act)
as amended by the Companies (Amendment) Act, 2000 (the Amendment Act) gives
for the first time statutory status to interim dividend with effect from
13th December 2000. Prior to such amendment the matter was governed by the
articles of association of a company. For example, Regulation 86 of Table
A empowers the Board of directors to pay interim dividend from time to time.
The Amendment Act defines ‘dividend’ as including interim dividend and contains
some express provisions regarding interim dividend. This brief article examines
critically provisions of the Amendment Act primarily relating to interim
dividend in relation to the final dividend and highlights some of the problems
arising therefrom in respect of interim dividend. In some cases drafting
amendments are called for to bring out clearly the intent of Government
in the matter as mentioned below.
Definition of ‘dividend’ — S. 2(14A) :
Clause (14A) S. 2 inserted by the Amendment Act defines ‘dividend’ as
including interim dividend. As the definition is an inclusive definition,
it extends the mean-ing of ‘dividend’ without affect-ing in any manner
its ordinary, popular and natural sense. In the case of a company which
is a going concern, ‘dividend’ ordinarily means the portion of the profits
of the company which is allocated to the holders of shares in the company.
Besides the extended meaning given to it, the said clause should also
be construed as having its ordinary meaning as aforesaid. The extended
mean-ing should be applied, unless the context otherwise requires. (See
the commencement of S. 2 containing definitions). In some cases the context
may require that dividend refers only to the final dividend declared by
the company in general meeting and not to the interim dividend paid by
the Board, since the characteristics of final dividend and interim dividend
vary in some respects. In such cases it would not be proper to equate
final dividend with interim dividend. That is the reason why Ss.(1C) of
S. 205 provides that S. 205, S. 205A, S. 205-C, S. 206, S. 206A and S.
207 shall, as far as may be, also apply to any interim dividend. The definition
of dividend as including interim dividend is not appropriate in some cases
as mentioned below.
Declaration of final dividend and payment of interim
Regulation 85 of Table A deals with the declaration of final dividend
by the company in general meeting and Regulation 86 deals with the payment
of interim dividend by the Board of directors. These two regulations are
almost invariably adopted by the companies in their articles of association
and are now given statutory status by S. 205 as amended. Regulation 85
empowers a company in general meeting to declare dividends and provides
that no dividend shall exceed the amount recommended by the Board. When
a company’s articles contain provisions as in the said regulation, it
is the usual practice that the Board recommends the amount of dividend
to be paid and the company in general meeting thereafter declares the
dividend. The dividend so declared is usually the amount recommended by
the Board. Shareholders may, however, reduce that amount but cannot increase
it. It is the prerogative of the Board of directors to recommend the amount
of dividend to be distributed to shareholders. S. 217(1)(c) requires that
the report of the Board of directors shall state the amount, if any, which
it recommends should be paid by way of dividend. When the Board does not
recommend any dividend, shareholders cannot insist on payment of dividend
even if the profits are sufficient, unless the Board fraudulently declines
to pay them [Bond v. Barrow Haematite Co., (1902) 1 Ch. 353].
The power of the company in general meeting regarding final dividend is
purely negative in the sense that it can reduce the amount recommended
by the Board but cannot increase it. Declaration of dividend is usually
made at the annual general meeting of the company and is one of the items
of the ordinary business to be transacted at such meeting as provided
in S. 173(l)(a).
Regulation 86 empowers the Board to pay from time to time to members such
interim dividends as appear justified by the profits of the company. Interim
dividend is the dividend paid by the Board at any time between two annual
general meetings of the company. The Board may pay more than one interim
dividend during a financial year. The declaration of interim dividend
depends much more on estimates and opinions than the declaration of final
dividend which is made upon the information contained in a formal balance
sheet. [Lucas v. Fitzgerald, (1903) 20 TLR 16, 18]. Prudence, however,
requires that the Board of directors satisfies itself that the financial
position of the company justifies the payment of interim dividend out
of the profits available for distribution. It is, however not necessary
to prepare interim accounts merely because the company pays interim dividends
in anticipation of the final dividend for the year to be declared by the
company in general meeting when the year’s accounts are presented. [Gower’s
Principles of Modern Company Law, Sixth Edition, p. 288].
All this clearly shows that declaration of dividend and payment of dividend
have distinct connotations in company law and are not interchangeable.
Final dividend and interim dividend distinguished :
The scheme of the Act shows that dividend simpliciter ordinarily
refers to the final dividend declared by a company in general meeting
as contemplated by Regulation 85 of Table A, whereas interim dividend
refers to the dividend paid by the Board as contemplated by Regulation
86. A shareholder’s right to final dividend arises only upon its declaration.
[Purushottamdas v. CIT, (1963) 48 ITR (SC)]. Final dividend becomes
a debt when it is declared by the company in general meeting and a share-holder
can sue the company for the purpose. Interim dividend does not become
a debt enforceable against the company when the Board resolves to pay
a certain amount as interim dividend. Board’s resolution to do so is not
a declaration of dividend and can therefore be rescinded or varied by
a subsequent resolution of the Board before the dividend is actually paid.
[Lagunas Nitrate Co. v. Schroeder, (1901) 85 LT 22, Potel v. IRC,
(1971) 2 ALLER 504 (Ch.D.)]. This is so even if the amount to pay the
proposed dividend has been placed into a separate bank account. In the
case of the final dividend, the date of declaration of the dividend by
the company in general meeting gives rise to an enforceable obligation,
whereas in the case of the interim dividend the date on which the Board
of directors resolves to make payment of such dividend does not give rise
to an enforceable obligation against the company.
The perusal of Regulations 85 and 86 clearly brings out the distinction
in the power of the company in general meeting and the power of the Board
of directors regarding dividends. Regulation 85 empowers the company in
general meeting to declare dividend. Regulation 86 does not give the Board
of directors the power to declare any dividend, but only enables the Board
to pay interim dividend to the members of the company from time to time.
As there is a difference in the power exercised by the company in general
meeting to declare dividend vis-à-vis the power exercised by the Board
of directors to pay interim dividend, it may be noted that in S. 205(1)
and S. 205(2A) the expression used is ‘no dividend shall be declared or
paid by a company.’ (Similar expression, namely, ‘any dividend declared
by a company or distributed or paid by it’ is used in clause (a) of S.
8 of the Income-tax Act, 1961 dealing with dividend income). The expression
‘declared or paid’ postulates a situation where there may be payment
of dividend without its declaration. This can be where the Board of directors,
and not the company in general meeting, decides to pay interim dividend.
This clearly shows that the nature of interim dividend is such that it
gives no right to the share-holders to receive the dividend merely on
the passing of the resolution by the Board of directors, whereas on a
dividend being declared by the company in general meeting, a vested right
accrues to the shareholders. [CIT v. Express Newspapers Ltd., (1998)
28 CLA 328 (SC)]. It is open to the Board to rescind the resolution regarding
the pay-ment of interim dividend before it is actually paid. In view of
the above the definition of dividend as including interim dividend contained
in S. 2(14A) will not be applicable in cases where there are distinguishing
features of final dividend and interim dividend as mentioned above.
Department’s circular letter dated 18-7-1981 criticised
The Department of Company Affairs has expressed the view that approval
of dividend is the privilege of the general meeting and the Board can
pay interim dividend if so authorised by the articles of association subject
to the regularisation of the interim dividend by the company in general
meeting — [Department’s letter no.8/13(205 A)/79-CL-V dated 18-7-1981].
Department’s view needs to be tested so far as interim dividend is concerned.
Regulation 86 of Table A empowers the Board to pay to the members interim
dividends. When the power for the purpose is vested in the Board, a resolution
of the company in general meeting, which might be interpreted as direction
to pay an interim dividend is a nullity. Shareholders themselves cannot
usurp the powers which by the articles are vested in the Board of directors
any more than the Board can usurp the powers vested by the articles in
the general body of shareholders. [Shaw & Sons (Salford) Ltd. v. Shaw,
(1935) 2KB 113 (CA)]. Members in general meeting cannot interfere
with the exercise of the powers by the Board. When a company’s articles
contain a provision as in Regulation 86, the power to pay the interim
dividend can be exercised only by the Board, and a declaration of interim
dividend by a general meeting will be void, unless a concurrent power
to declare such a dividend is expressly conferred on it by the articles.
[Scott v. Scott, (1943) 1 AII E.R. 582]. When the power to pay interim
dividends is conferred on the Board, the company in general meeting cannot
interfere with the exercise of that power, nor can it override the decision
arrived at by the Board. Thus shareholders have no say in the matter of
Payment of interim dividend is not conditional upon the subsequent declaration
of such dividend by a general meeting. (Palmer’s Company Law, 24th
edition, p. 1099). When the power for the purpose is vested by the articles
on the Board, the company in general meeting cannot interfere with the
exercise of the said power. In this view of the matter the view expressed
in the afore-said letter of the Department requiring regularisation of
the interim dividend in general meeting needs reconsideration. Similarly
the view expressed in Ramaiya that “interim dividend will require subsequent
sanction by members at their annual general meeting” (Ramaiya’s Guide
to the Companies Act, Fifteenth Edition, p. 42) is not correct and
Dividend to be deposited in a separate bank account
— S. 205(1A) :
Ss.(1A) of S. 205 provides that the Board of directors may declare interim
dividend. In the case of interim dividend there is no declaration of dividend,
but there is payment of dividend by the Board without its declaration.
Hence the word ‘declare’ may in the context be construed as ‘pay’ giving
thereby statutory sanction to the payment of interim dividend as provided
in Regulation 86 of Table A. The sub-section further provides that the
amount of dividend including interim dividend shall be deposited in a
separate bank account within five days from the date of declaration of
‘such dividend’ i.e., dividend including interim dividend referred to
in the earlier part of the sub-section. Both the final dividend and the
interim dividend are to be deposited in a separate bank account within
the period afore-said. Ramaiya’s observation that “the interim dividend
shall be deposited in a separate bank account” (Ramaiya’s Guide to
the Companies Act, 15th edition, p. 1789) is not correct and needs
As the interim dividend is paid by the Board without any declaration of
dividend, it may be deposited in a separate bank account within five days
from the date on which the Board resolves to pay such dividend. The Board
has no doubt the power to rescind the resolution before such dividend
is paid. In such case the provision regarding the deposit of such dividend
in a separate bank account would become ineffective or otiose in law.
Further since ‘dividend’ as defined by S. 2(14A) includes interim dividend,
the expression ‘including interim dividend’ after the word ‘dividend’
used in Ss.(1A) as well as Ss.(1B) seems unnecessary.
Ss.(1A) of S. 205 is not happily worded and needs amendment to bring out
clearly the intent of Government in the matter.
Payment of dividend out of amount deposited — S. 205(1B)
Ss.(1B) of S. 205 provides that the amount of dividend includ-ing interim
dividend so deposited U/ss.(1A) shall be used for payment of interim dividend.
The amount of the final dividend and the interim dividend are to be used
for payment of such dividend. The expression ‘interim dividend’ used at
the end of the sub-section is obviously an inadvertent error. Having regard
to the intention of Parliament the said expression should be read as ‘such
dividend’, i.e., the final dividend or the interim dividend, as the case
may be. This is permissible in view of the well accepted rule of con-struction
of statutes enunciated by Denning L J in Seaford Courts Estates Ltd.
v. Asher, (1949) 2 All E.R. 155, 154 (CA), namely, that “A judge should
not alter the material of which the Act is woven, but he can and should
iron out the creases.”
Provisions applicable to interim dividend — S. 205(2C)
Ss.(1C) of S. 205 provides that the provisions contained in S. 205, S.
205A, S. 205C, S. 206, S. 206A and S. 207 shall, as far as may be, also
apply to any interim dividend. These Sections are to be applied to interim
dividend, so far as they may be applicable or relevant for the purpose.
Each and every provision contained in these Sections would not be applicable
to interim dividends since final dividend and interim dividend have distinct
features and powers for the purpose are vested in different authorities.
Dividend to be paid within 30 days — S. 205A(1) :
S. 205A(1) provides for the payment of dividend declared by a company
within thirty days from the date of declaration. This provision is applicable
to the final dividend declared by the company in general meeting. It is
difficult to apply this provision in the case of the interim dividend,
where payment of the dividend is made without its declaration. However,
in view of the definition of ‘dividend’ contained in S. 2(14A) as well
as S. 205(1C) provisions of S. 205A should be construed as applicable
to interim dividend as well. Interim dividend should be paid within 30
days from the date of the Board’s resolution authorising payment of such
dividend. Dividend is to be paid only to the registered holder of shares
or to his order or to his bankers as provided in S. 206(1)(a). Unpaid
or unclaimed dividend, whether final or interim, must be transferred to
the Unpaid Dividend Account of the company within seven days from the
expiry of 30 days from the date of declaration of the dividend as provided
in S. 205A(1). Before the expiry of the said period, the Board may rescind
the resolution for payment of interim dividend. In such a case the question
of transfer of the unpaid or unclaimed interim dividend to the Unpaid
Dividend Account would not arise.
Clause 16 of the Listing Agreement needs amendment :
Clause 16 of the Listing Agreement requires a listed company (a company
listed on a stock exchange) to give 42 days’ notice to the stock exchange
for fixing the record date or for the book closure. This can be done when
the actual date of dividend proposed to be declared is made known as required
by stock exchange regulations. In respect of shares held in the demat
form the stock exchange requires 30 days’ notice for purposes aforesaid.
For these purposes stock exchanges may be required to agree to notice
of a shorter period. Clause 16 requires to be duly amended by reducing
the period of notice of book closure from 42 days to a shorter period.
The matter needs to be taken up by the Department with the Securities
and Exchange Board of India for necessary action.
Penalty for failure to distribute dividend within thirty
S. 207 provides for penalty for default to distribute dividend within
thirty days from the date of declaration. Besides imprison-ment for a
term upto three years and a fine of Rs.1000/- for every day during which
the default continues, the company is liable to pay interest at the rate
of 18% per annum during the period for which such default continues. Such
interest must enure to the benefit of the members of the company. See
in this connection the provision contained in S. 205A(4) regarding default
in transferring unpaid dividend to the unpaid dividend account of the
Tax on interim dividend :
A mere resolution of the Board of directors to pay a certain amount as
interim dividend does not create a debt enforce-able against the company.
Interim dividend is taxable as the income of the year in which the dividend
warrant is actually issued. S. 205(1A) authorises the Board of directors
to declare interim dividend and not to pay interim dividend as provided
in Regulation 86 of Table A. How-ever, that makes no difference in the
true character of the right arising in favour of the shareholders of the
company on the exercise of the power by the Board. [J. Dalmia v. CIT,
(1964) 43 ITR 83, 87 (SC). See also Potel v. IRC, (1971) 46 T.C. 658,
667; CIT v. Godfrey Philips, (1986) 161 ITR 684]. The above principle
is now given statutory effect by clause (b) of S. 8 of the Income-tax
Act, 1961, which makes interim dividend taxable as the income of the year
in which it is ‘unconditionally made available’ (i.e. paid) to the shareholder.
Dividend is taxable in the hands of the share-holder as recipient subject
to deduction u/s.80L upto the ceiling of Rs.9,000/-. With effect from
1-6-2002 tax on dividend is required to be deducted at source. No deduction
shall, however, be made in the case of a shareholder, being an individual,
if the amount of such dividend distributed or paid during the financial
year by the company to the shareholder does not exceed Rs.1,000/-. [S.