Is P/L Cr Bal part of NW, Free Reserves under CA2013 ?

[Sumit Binani]

Dear Professional Colleagues & Seniors,

Most companies have been following the practice of retaining their excess profit under the Profit & Loss Account under the Companies Act, 1956. Such profit was usually not transferred to any reserve because paying dividend by utilising such free reserves would entail certain compliance as compared to directly distributing it by utilising the credit balance lying in the profit and loss account.

However, under the Companies Act, 2013 (CA 2013), the definition of free reserves does not include the surplus or credit balance in the profit and loss account. Similar is the observation, when one reads the definition of net worth under the said Act.

I am putting forth my personal view and understanding on the matter. The same is enclosed as an attachment to this email.

Trust you shall find it useful. Please feel free to write to me in case you have any other views.

Best Wishes & Regards

Sumit Binani

 

 

[Aditya Banerjee]

Dear Mr Binani,

Your article on Reserves and Surplus is well written and relevant also. 

You have also touched upon transfer to / from 

Reserves. 

In this regard do you suggest one can 
transfer from Reserves to Surplus.  Therefore  can one transfer Deb Redemption Reserve to Surplus after full repayment?

Would be grateful if you elaborate on this also. 
Thank you. 

A Banerjee. 

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<PL Cr Balance.pdf>

[Ankit Agarwal]

Dear Sumit Binani Sir,

The exact definition of Free Reserves u/s 2(43) of Companies Act 2013 is as followed:

“free reserves” means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend.

Since the definition says that reserves that are available for distribution as dividend, from point of view of both Companies Act 2013 and Income Tax Act 1961 and also as per practice, it can be interpreted that Credit Balance in Profit/Loss Account do forms a part of Free Reserves.

Further Grossing Up Concept u/s 115-O of Income Tax Act was introduced with the view that, from the available profits for distribution, first the tax portion shall be extracted from the total available distribution and then the profit shall be distributed.

Therefore as per my view Credit balance in Profit and Loss Account do form a part of free reserves.

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Regards,
Ankit Agarwal

Lodha & Co.

Mob. No: 09953257436

[Sumit Binani]

Hi Ankit,

Please observe the definition of free reserves which means "such reserves.......  Reserves does not include Surplus.

My note was keeping in view the applicability of the definition as per CA 2013 which is an anamoly and needs to be re[resented before MCA.

However, as per the current definition, the cr bal in P/L does not form part of Free Reserves. MCA needs to look into it immediately.

Thanks for writing

Sumit

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From: ankitag...@gmail.com
Date: Fri, 20 Nov 2015 18:24:43 +0530
Subject: Re: [CA RUNGTA PD] Is P/L Cr Bal part of NW, Free Reserves under CA2013 ?
To: foru...@googlegroups.com