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Definition

Capital reserve

The term ‘Capital reserve’ has not been defined by the Companies Act except negatively in the Part III of schedule VI as “a reserve which shall not include any amount regarded as free from distribution through the Profit and Loss Account”. In other words, profits which cannot be distributed in the form of dividends shall be treated as Capital Reserve. The following are some of the incomes which are credited to Capital Reserve:

  • Profits prior incorporation.
  • The excess of the net value of the assets taken over the purchase price paid to a vendor.
  • Appreciation in the book value of the fixed assets on revaluation.
  • Share premiums, Capital Redemption Reserve Funds, etc.
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