# Declaration of Dividend — Sources (Section 123)
## What is a Dividend?
A dividend is an apportionment of revenue profits distributed to shareholders. It is the shareholder's share of the company's earnings.
## The Four Permitted Sources
A company may declare or pay dividend for any financial year only out of:
| Source | Description |
|---|---|
| (a) | Profits of the company for that year — after providing for depreciation per Section 123(2) |
| (b) | Profits of any previous financial year(s) — after providing for depreciation, remaining undistributed |
| (c) | A combination of (a) and (b) |
| (d) | Money provided by the Central/State Government for payment of dividend, where the Government has given a guarantee |
## Crucial Exclusion (Proviso)
While computing profits for dividend, the following must be excluded:
- Unrealised gains
- Notional gains
- Revaluation of assets
- Any change in carrying amount of an asset/liability on fair value measurement
> Why? Dividend is paid from real, realised profits — not paper gains. Distributing notional/unrealised gains would effectively be distributing capital.
## Why Depreciation Must Be Provided First
Depreciation is a notional estimate of reduction in an asset's value due to:
1. Wear and tear
2. Efflux of time
3. Improvements in technology
If depreciation is NOT provided for:
- The asset value is overstated in the Balance Sheet
- Current year profits are overstated
Consequence at winding-up: Assets appear sufficient on paper to repay capital, but realisable value falls short. In effect, the company would have distributed dividend out of capital — which is prohibited (the same logic that prohibits issue of shares at a discount).
Hence, the law mandates provision for depreciation out of profits before declaring dividend.