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Monday, 21 November 2011

What are capital profits? Are these available for distributor as dividend

CAPITAL PROFITS :-
Those which are not entered during the course of business are called capital profits or non trading profits. It has the following types :

1. Profit realized on sale of fixed assets.

2. Premium received on the issue of debentures and shares.

3. Amount of credit on re-issue of fortified shares.

4. Profit obtained by regarding its own debenture.

5. Profit prior to incorporation.


LEGAL AND COMMERCIAL POINT OF VIEW :
In case of divisible profits legal point of view is much wider then the commercial view. Its object is to make good all losses whether revenue or capital before determining the profits.

Generally capital profits are not used for the distribution of dividends. However these can be distributed in the following circumstances.

1. If it is permitted by the articles of association of company.

2. The profit is realized one.

3. If their distribution would not leave the company insolvent in the sense that it is unable to pay its debts as and when they fall due for payment.

4. If profit remains after the revaluation of all the assets.

LEGAL DECISION REFERENCE :-

i. Lubbock Vs British Bank of South America (1892).

ii. Foster Vs New Trinidad Lak Asphalte Co. Ltd. (1901).

5. Capital profits can be utilized for the distribution in the form of bonus shares, since the assets are not reduced in any way.

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