EXTENSION OF FINANCIAL YEAR OF A COMPANY- HOW AND WHAT TO DO

A lot is talked about the due dates for the ROC filings of a company and the consequential late fees relating to its non-compliance. However, even after all the deliberations, some or the other confusion or ambiguity springs up in the mind of the directors/owners. In this article, we are elaborating one such issue which is a gray area and subject to lots of contradictory perceptions-“Extension of Financial year of a company.”

As per section 2(17) of Companies Act 1956,“Financial year” means, in relation to anybody corporate, the period in respect of which any profit and loss account of the body corporate laid before it in annual general meeting is made up, whether that period is a year or not.

Section 166 of the Companies Act 1956 requires that every company to hold during every year a general meeting of its members irrespective of the company being a public company or a  private company.  Such meeting is called an annual general meeting.  Holding the annual general meeting every year is mandatory by law for every company as per the section 166 of the Companies Act 1956. As per section 166 of the Companies Act, 1956, the companies could hold its annual general meeting within fifteen months of the last annual general meeting. So long as the companies hold annual general meeting within the above specified time limit, no approval from any of the regulator is required for holding such meeting.  However, a further extension of the financial year restricted to three months can be granted by the ROC on special grounds. For this purpose, an application can be made to the ROC in eForm 61.

Certain critics are of the opinion that the decision of the company of extending its financial year can only be taken before the end of the financial year or at best before the period by which the FY is to be extended expires. However, this is not the case. The same can be extended even thereafter. As held by the High Court of Delhi in the case of Dinesh Saini vs. Union of India, July 23, 2013(Del), LD/62/64, the provisions of Section 210 of the Companies Act does not require the company to take decision to extend the financial year, either by the end of the financial year or within the time period by which the financial year is to be extended. The decision can be taken at any time though the period cannot be extended beyond three (3) months before obtaining prior approval of the Registrar.

In the above case, by way of resolution dated 11.08.2011, the company decided to extend the accounting year 2010-11 by three months so as to end the said year on 30.06.2011. Consequently, it became eligible to hold the AGM, for the purpose of considering the Profit & Loss Account and Balance Sheet, on or before 31.12.2011. The contention of the petitioner was that the decision to extend the accounting year can be taken by the company before the end of the financial year or at best before the period by which the FY is to be extended expires and not thereafter.

Example: XYZ Private Limited figures out on 29^th March, 2013, that due to some unforeseen turn of events, it will not be able to finalize its accounts by the end of the concerned FY, i.e. FY 2012-13. Hence, it will not be possible for the company to hold a board meeting at such a short notice. Therefore, it would be unrealistic to take a view that in every case, the company must take decision before the end of the financial year or at best before the period by which the FY is to be extended expires.

Hence, in a nutshell, the financial year of a company can be extended upto 15 months without any prior approval from any authority. The only requirement is to conduct a Board meeting and pass a Board Resolution to that effect. For extending upto 18 months, special permission from the Registrar has to be obtained via eForm 61.

However, there are certain drawbacks with respect to this mechanism. For instance, there has to be two financial years, one with respect to the ROC and another with respect to the Income Tax Department. Hence, the compliance procedures may get clumsy at times. Having said that, as the old saying goes, “nothing is perfect”. Hence, this decision, like any other decision should be taken only after contemplating all the relevant pros and cons of the circumstances.

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