A.
COMPULSORY TRANSFER TO RESERVES
1.
No amount need be transferred to Reserves if the dividend declared
does not exceed 10%.
2.
No dividend can be declared and paid in excess of 10% unless
minimum amount prescribed as under is transferred to Reserves.
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3.
According to the department, Profits for this purpose, have to be
taken as net after deducting depreciation (including all arrears), statutory
transfer to Reserves, taxation etc. and including therein, other adjustments
such as transfer from statutory reserves after compulsory period is over,
taxation or other provisions pertaining to previous year no longer required
etc.
4.
According to the department, transfer to Reserves includes only
transfer to free reserves and does not include any other transfer such as
investment allowance Reserve etc.
B.
VOLUNTARY TRANSFER TO RESERVES
1.
Rules have been prescribed for transferring to reserves in excess
of 10% of profits. There is no restriction on transfer up to 10% of profits.
2.
The Rules are as under
a.
Where a dividend is declared and the net profit after tax is lower
by 20% or more than the average net profit after tax of the two immediately
preceding financial years — no conditions are to be fulfilled.
b.
Where a dividend is declared and not covered under (a) above, the
dividend should be at a rate at least equal to the average of the rates at
which dividends were declared in the immediately preceding three years,
provided that, where bonus shares have been issued in the financial year in
which the dividend is declared or in any of the three preceding years, the
dividend declared should be an amount at least equal to average amount of
dividend declared over the three years immediately preceding the financial
year.
c.
Where no dividend is declared, the amount proposed to be
transferred to the reserves from the current profits shall be lower than the
average amount of dividends declared in the immediately preceding three years.
3.
According to the department, whatever profits are not transferred
or could not be transferred to Reserves have to be carried forward in the
profit and loss account.
4.
A new company which does not declare any dividend would not be
able to transfer any amount to Reserves in excess of 10% of current profits for
first three years according to the view expressed by the Department of Company
Affairs, on 26.7.1976.
5.
Penalty of up to Rs. 500 with further fine not exceeding Rs. 50
per day for continuing defaults, has been prescribed by the rules, for
contravention of the rules.
C.
DECLARATION OF DIVIDEND OUT OF RESERVES
1.
Wherein any year there is a loss, or the profits are inadequate to
declare a dividend, the dividend can be declared, out of the accumulated
profits earned by the company in previous years and transferred to reserves,
subject to certain rules.
a. Rate of dividend shall not exceed average of rates of dividend
declared in preceding 5 yrs subject to a max. of 10%. For calculating average,
the "no dividend" yrs have to be included and rate should be taken as
NIL.
b. The total amount to be withdrawn out of reserves shall not exceed
10% of the aggregate of paid-up capital and free reserves and this amount shall
first be utilised to set off the losses incurred in the financial year and the
balance only may be utilised to distribute dividend as determined in (a) above.
c.
The balance in the Reserves shall not fall below 15% of paid-up
share capital after the amount withdrawn necessary for the purpose of dividend
and set off of losses of the current year.
3. The total amount of Reserves shall mean only free Reserves not
including any Capital Reserve or Statutory Development Rebate Reserve (amount
required by the I.T. Act to be retained in the account). In other words, free
reserves will mean only distributable Reserve.
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