As per Section 2(41) of the Companies Act, 2013 (“Act”), financial year, 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 the financial statement of the company or body corporate is prepared.
Hence, in case a company or body corporate is incorporated on or after 1st day of January of a year, the financial year ending on the 31st day of March of the following year i.e., from January to March of the following year shall be the first financial year in respect of the financial statements of the company or body corporate. Therefore, the financial year of a company or a body corporate is 12 (twelve) months, however, in the case of the first financial year, it can be 15 (fifteen) months.
Reasons for change of financial year: Changing the financial year of a business or organization is a significant decision that typically requires careful planning and adherence to legal and accounting regulations. The financial year can be aligned with the calendar year (January 1st to December 31st) or any start and end dates covering a period of 12 months, depending on the organization’s preference and local regulations. A company, which is a holding company a subsidiary company, or an associate company of a company incorporated outside India and follows a different financial year to what is followed by the foreign entity, may opt for a different financial year for smooth consolidation of accounts and alignment of the practices globally. Therefore, the management of the company may change the financial year of the company for operational convenience and to improve the reporting requirements.
Procedure for change in financial year: The procedure for change in the financial year of the company is prescribed under Rule 40 of Companies (Incorporation) Rules, 2014, which is as given below: –
- Convene a meeting of the board of directors to discuss and approve the board resolution for the change in the financial year.
- File a certified true copy of the board resolution approving the change in financial year to the concerned Registrar of Companies (“ROC”) in e-Form MGT-14 within 30 (thirty) days of the board meeting.
(The said requirement for filing e-Form MGT-14 does not apply to private companies).
- File e-Form RD-1 to the concerned Regional Director (“RD”) along with the following documents:
- grounds & reasons for the application for change in the financial year of the company.
- a copy of the minutes of the board meeting at which the resolution authorizing such a change was passed, giving details of the number of votes cast in favour and or against the resolution.
- Power of Attorney or Memorandum of Appearance, as the case may be;
- details of any previous application made within the last 5 (five) years and outcome thereof along with a copy of the order.
- copy of the memorandum and articles of association.
- affidavit verifying the petition.
- File e-Form GNL-2 to the concerned ROC, along with all the documents mentioned above.
- Upon examination of the application and other documents submitted in e-Form RD-1, the RD may call for further records, information, or explanation as he may deem necessary within 30 (thirty) days of receipt of the application. Where no order for approval resubmission or rejection has been communicated by the RD within 30 (thirty) days of making the application, then it shall be deemed that the application stands approved, and an approval order shall be automatically issued to the applicant.
- File a certified copy of the order granting the approval for change in the financial year in e-Form INC-28 within 30 (thirty) days of receipt of the order.
Conclusion: The provision for change in the financial year under the Companies Act represents a significant step towards enhancing corporate flexibility and adaptability in a rapidly evolving business environment. While the transition process may require careful planning and consideration, the potential benefits far outweigh the challenges. As companies embrace this change, they position themselves for greater resilience and success in the years ahead, ensuring their financial calendars mirror the ever-changing dynamics of modern commerce.
Frequently Asked Questions (FAQS)
Q1. Can a company follow a different Financial Year?
Ans. Where a company or body corporate, which is a holding company, or a subsidiary company or associate of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India can follow a different financial year.
Only such a company can change its financial year after following the prescribed procedure as laid down under the Act and rules framed thereunder.
Q2. What is the post-effect of change in the financial year?
Ans. The consequential effect of change in the financial year in different aspects are given below:
From the viewpoint of Income Tax: The applicant company shall continue to prepare books of accounts and financial statements for the financial year starting from April 1st to March 31st or as may be required under the Income Tax Act, 1961, get the books of accounts audited accordingly and file the return of income as per the provisions of the Income Tax Act, 1961.
From the viewpoint of the Companies Act: Pursuant to the change in financial year, all the compliances and filings under the Companies Act shall be made as per the new financial year.
Further, it is pertinent to note that the tenure of statutory auditors entails from one annual general meeting to another annual general meeting. Therefore, the change in financial year shall have no effect on the financial period for which the e-form ADT-1 for auditor’s appointment was filed and the auditors shall continue to audit the accounts till the number of annual general meetings for which they were originally appointed before the change of financial year.
From the viewpoint of FEMA: The Company shall file the annual return of Foreign Liabilities and Assets (“FLA Return”) to the Reserve Bank of India by July 15th of every year, irrespective of whatever the financial year.