Dividends ‑ Declaration of ‑ Transfer to reserves of certain percentage of profits ‑ Queries arising from the Companies (Transfer of Profits to Reserves) Rules, 1975 and the Companies (Declaration of Dividend out of Reserves) Rules, 1975 - Companies Law - Letter: No. 8/3/76‑CL‑V,

Letter: No. 8/3/76 ‑ CL ‑ V, dated 12 ‑ 3 ‑ 1976. Subject:-Dividends ‑ Declaration of ‑ Transfer to reserves of certain percentage of profits ‑ Queries arising from the Companies (Transfer of Profits to Reserves) Rules, 1975 and the Companies (Declaration of Dividend out of Reserves) Rules, 1975 answered Query: Section 205(2A) provides that Notwithstanding anything contained in sub‑section (1), on and from the commencement of the Companies (Amendment) Act, 1974, no dividend shall be declared or paid by a company for any financial year out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub‑section (2), except after the transfer to the reserves of the company of such percentage of its profits for that year, not exceeding 10 per cent, as may be prescribed: Provided that nothing in this sub‑section shall be deemed to prohibit the voluntary transfer by a company of a higher percentage of its profits to the reserves in accordance with such rules as may be made by the Central Government in this behalf . The word higher in this connection could only have been a mistake because no legislation should or could possibly prohibit or regulate a higher percentage of profits to be transferred to reserve. Such a transfer of a higher amount would be in accordance with a sound financial policy. The intention of the proviso could only be that a lower percentage may be transferred to reserve funds in accordance with rules to be made by the Central Government to provide for cases of hardship. Following this error in the proviso, now the Government has come out with a new set of Rules under which a company is prohibited from transferring more than a certain percentage of its profits to the reserves. The result would be that in many cases the companies would be forced to carry forward large amounts as balance to the credit of profit and loss account but not as reserves . If the management of a company wishes to transfer a certain amount to a reserve, there is no conceivable good reason to place a restriction on such transfer. The situation seems to be that because of a drafting error in the proviso, Rules have now been framed to comply with the erroneous proviso. It is, therefore, requested that the proviso should be amended to substitute the word higher by the word lower and the rules prescribing conditions governing voluntary transfer of higher percentage (i.e., higher than 10 per cent of the profits) to the reserve should be repealed. Answer: The matter has been examined. The contention of the chamber that the word higher used in proviso to section 205(2A) was a mistake is not correct. It is only an enabling provision to transfer voluntarily a higher percentage of profits to the reserves subject of course to the rules made by Government in this behalf.