MEANING OF FREE RESERVES:
Kindly appreciate law is silent regarding definition of Free Reserves in the Section 293(1)(d). It only says that free reserves means reserves not set apart for any specific purposes.
As per general understanding in the absence of definition of free reserve Section 293(1)(d) the term free reserve means to include both capital and revenue reserves.
The term reserves are used in the different Section, like Sec. 205(2A) requires the transfer to reserve a portion of profit while declaring the dividend. The free reserves in this sub-section means revenue reserves and not the capital reserves.
The expression ‘free reserves’ also defined in Sec. 372A which means reserves, which as per latest audited balance sheet of the company, are free for distribution as dividend and include the security premium account but shall not include share application money.
On the basis of general interpretation the following reserves will be treated as free reserve:------
a. General reserve.
b. Balance held in the Security Premium Account.
c. Capital and Debenture Redemption Reserve.
d. The amount of surplus shown in the Profit & Loss Account and carried forward under the heading “Reserve and Surplus” in the Balance Sheet.
e. Any other reserve shown or appeared in the Balance Sheet and created by the appropriation of profits.
But does not include the following:
a. Capital Reserve.
b. Revaluation Reserve.
c. Any reserve created for the repayment of any future liability.
Though it is not specifically provided that arriving at the aggregate of free reserves, the amount of accumulated loss, balance deferred revenue expenditure should be deducted, it should be deducted in the arriving the amount of free reserve for the purpose of Sec. 293(1)(d).