Free Reserves

yes it includes

Yes. Its because accumulated balance in P&L A/c can be freely used without any restrictions. Other reserves have some restrictions on their use like securities premium, statutory reserves etc. but not free reserves.

while I agree that companycan declare dividend out of p&l balance I doubt whether it is part of free reserves. Section 123(b) 2nd provision clearly separates accumulated profit balance from free reserves. It says any accumulated profit transferred to free reserve can be used for dividend only in accordance with rules. that means profit will become free reserves only if it is transferred to reserves account.