While adopting accounts for the year, the Board of directors of Prima Ltd. decided to consider the interim dividend @ 12% as final dividend and did not consider transfer of profit to reserves. Explain whether decisions o

Section 123 of the Companies Act, 2013 provides for the provisions relating to declaration of dividends. Since interim dividend is also a dividend, companies should provide for depreciation under section 123 of the Companies Act, 2013 before declaration of interim dividend. However, the first proviso to the section 123(1) of the Companies Act, 2013 provides that a company may, before declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it consider appropriate to the reserves of the company irrespective of the size of declared dividend i.e. company is not mandatorily required to transfer the profit to reserves, and it is only an option made available to the company to transfer such percentage of profit to reserves. In the instant case, the Board has decided to pay interim dividend @ 12% of the paid up capital. Assuming the company has complied with the depreciation requirement and other applicable provisions, the interim or final dividend can be declared without transferring such percentage of its profits as it may consider appropriate to the reserve of the company. Thus, from the facts and provisions, it may be concluded that Prima Ltd is under no violation of law by not transferring i.e. the company is free to transfer any amount of its profit to the reserves, without any compulsion or restriction before declaration of any dividend. Section 123(3) of the Companies Act, 2013 provides that the Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till holding of the annual general meeting out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend. The amount of dividend including interim dividend should be deposited in a separate bank account within five days from declaration of such dividend for compliance of section 123(4) of the Companies Act, 2013.