Madras High Court on Reassessment for First 15-Month Financial Year: IFC IVF Private Limited Vs JCIT

Background of the Dispute

In IFC IVF Private Limited Vs JCIT (Madras High Court), the Madras High Court examined whether reassessment proceedings under Section 147 of the Income Tax Act, 1961 could be sustained where a newly incorporated company had already disclosed its entire income for a 15‑month first financial year in a valid return of income.

The assessee-company, IFC IVF Private Limited, was incorporated on 01.01.2020. Relying on the flexibility provided under Section 2(41) of the Companies Act, 2013, it adopted its first financial year as a 15‑month period running from **01.01.2020 to 31.03.2021`.

For this entire 15‑month period, the assessee:

  • Treated 01.01.2020 to 31.03.2021 as its first financial year;
  • Filed a return of income for Assessment Year (AY) 2021-22; and
  • Declared total income of Rs.3,45,55,070/- for that period.

The return was processed and assessment proceedings for this 15‑month period were concluded by the Department.

Later, the Income Tax Department initiated reassessment proceedings on the basis that a separate return had not been filed for the earlier three-month period from 01.01.2020 to 31.03.2020, which, in the Department’s view, corresponded to AY 2020-21.

This triggered:

  • A notice under Section 148;
  • A reassessment order under Section 147;
  • A demand notice based on the reassessment; and
  • Proceedings under Section 226(3) for recovery.

These actions were challenged by the assessee before the Madras High Court via a writ petition.

Key Facts Considered by the Court

Incorporation and First Financial Year

  • The company was incorporated on 01.01.2020.
  • Under Section 2(41) of the Companies Act, 2013, where a company is incorporated on or after 1 January, its first financial year may end on 31 March of the following year.
  • The assessee accordingly adopted 01.01.2020 to 31.03.2021 (15 months) as its first financial year.

Return of Income and Assessment

For this first 15‑month financial year:

  • The assessee filed its return of income for AY 2021-22.
  • Income declared: Rs.3,45,55,070/- for the entire period from 01.01.2020 to 31.03.2021.
  • Assessment proceedings for this period were completed by the Department.

Basis for Reassessment

Despite the above, the Department proceeded on the footing that:

  • A distinct assessment year, AY 2020-21, covered the three-month period from 01.01.2020 to 31.03.2020;
  • No separate return had been filed for those three months;
  • Income relating to that three-month period had therefore “escaped assessment”; and
  • Reassessment under Section 147 was warranted.

Pursuant to this reasoning, a:

  • Notice under Section 148,
  • Reassessment order under Section 147,
  • Consequential demand notice, and
  • Recovery proceedings under Section 226(3)

were initiated and issued against the assessee.

Submissions Before the Madras High Court

Assessee’s Contentions

Counsel for the assessee argued in essence:

  1. Validity of 15-Month First Financial Year
    • By virtue of Section 2(41) of the Companies Act, 2013, a company incorporated on or after 1 January is legally permitted to adopt a first financial year ending on 31 March of the succeeding year.
    • Thus, the first financial year of the assessee from 01.01.2020 to 31.03.2021 (15 months) was legally compliant.