DECLARATION OF DIVIDEND OUT OF RESERVES
AND TRANSFER OF PROFITS TO RESERVES RULES
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COMPULSORY TRANSFER TO RESERVES
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No amount need be transferred to Reserves
if the dividend declared does not exceed 10%.
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No dividend can be declared and paid in
excess of 10% unless minimum amount prescribed as under is
transferred to Reserves.
10.0%
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12.5%
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2.5%
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12.5%
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15.0%
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5.0%
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15.0%
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20.0%
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7.5%
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20.0%
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10.0%
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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.
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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.
VOLUNTARY TRANSFER TO RESERVES
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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.
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The Rules are as under
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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.
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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.
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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.
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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.
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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.
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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.
DECLARATION OF DIVIDEND OUT OF RESERVES
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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.
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The following conditions have to be
fulfilled before declaring dividend out of reserves :
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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.
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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.
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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.
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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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