The Companies Act, 2013 (Act), Section 2 (41), defines ‘financial year’ as follows,
“In relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up:
Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year:
Provided further that a company or body corporate, existing on the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause;”
This section does not give the Company Law Board (CLB) nor the Registrar of Companies (ROC) any certain or express power for the extension of the financial year. The first provision of this section sheds light on when the CLB has the power to allow any period as the financial year. But this is with regards to only if a subsidiary of a foreign holding company is required to comply with a different financial year for the maintenance of its accounts outside of India.
Therefore it can now be understood that any company that is purely Indian does not need to take permission from the CLB or the respective ROC to extend their financial year. This takes us to when can the company extend its financial year.
1. Annual General Meeting and Extension
According to Section 129 (2) of the Act, at every annual general meeting of a company the Board of Directors of the company have to lay before this meeting the financial statements for the financial year.
This means the financial year is dependent upon the intervals in which the annual general meetings are conducted so as to present the financial statements of that financial year and finalize its accounts. This brings us to the regulations that govern how often must an annual general meeting be held.
According to section 96 (1) of the Act, an annual general meeting must be held every year, i.e. every 12 months. But this period may be extended by 3 months to a total of 15 months from the previous annual general meeting by way of a board resolution. This period may be, with the permission of the ROC, in the exercise of its powers under Section 210 (4) and under second provision under Section 166 (1), extended by another 3 months. Therefore the company can effectively extend its financial year to 15 months without the need to gain permission from the CLB or the ROC.
Example: Company ‘X’ is stuck in a position where it is unable to finalize its books of accounts for the financial year of 2018-19 by 31st of March. To ensure that the financial statements are presented at the annual general meeting the company may extend its financial year up to 15 months, i.e. by an extra three months to finalize their books of accounts without the prior permission of any authority.
All they need to do is to hold a board meeting and pass a board resolution to the same effect.
2. When Can The Decision Be Taken?
Until 2013 there was no definite answer to this question, and it was widely accepted that such a decision must be taken before the end of the financial year or at least before the end of the additional 3 month period. But in a case heard by the Delhi High Court, the Honourable Court held that since no provision clearly or definitively states the latest period to come to a decision, it is up to the company itself to choose when to make it. It may pass the resolution at any time, though the period cannot extend beyond three months without taking the prior approval of the ROC.
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