Providing for proposed dividend in profit and loss account and showing the same under the head “Current liabilities and provisions” in balance sheet ‑ Whether statutory obligation breach of which invites prosecution - Companies Law - Circular: No. 3/124/75‑CL‑V,

Circular: No. 3/124/75 ‑ CL ‑ V, dated 22-11 ‑ 1976. Subject:- Providing for proposed dividend in profit and loss account and showing the same under the head Current liabilities and provisions in balance sheet ‑ Whether statutory obligation breach of which invites prosecution The Department agrees that the dividend becomes a liability only when it is approved by the shareholders at the annual general meeting. It may, however, be appreciated that the payment of dividend and provision for proposed dividend in the balance sheet and the profit and loss accounts are two different aspects. So far as the provision for proposed dividend is concerned, this question has been carefully considered taking into account the following factors: Requirements of para 3(xiv) of Part II of Schedule VI and item (9) under the head Provision in Part I of Schedule VI; Item (5) given below the heading Reserves and Surplus in Part I of Schedule VI; Requirements of marginal instruction given against the heading Reserves and Surplus in Part I of Schedule VI read with the provisions of the Companies (Declaration of Dividend out of Reserves) Rules, 1975; Requirements of the Companies (Transfer of Profits to Reserves) Rules, 1975 in the event of proposed dividend exceeding 10 per cent; and Provisions of section 217(1)(c). In view of the above facts, the Department is of the firm view that there is a statutory obligation on the part of the companies to provide for proposed dividend in their profit and loss accounts and show the same under the head Current liabilities and provisions in the balance sheet. The failure to make such provisions in the accounts amounts to contravention of Schedule VI read with section 211 and the accounts which do not incorporate such provisions will not be regarded as reflecting a true and fair view of the state of affairs of the companies, thereby rendering the directors and other officers concerned liable for penal action as envisaged in sub‑sections (7) and (8) of section 211. It is also the duty of the auditors to bring out clearly in their reports the facts of these contraventions, failing which they will be liable for being proceeded against under the Chartered Accountants Act and Rules framed thereunder.