Liability of directors of private company in liquidation for payment of tax due

Liability of directors of private company in liquidation for payment of tax due

Section 179 of Income Tax Act, 1961, provides that, where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any other income of any previous year during which such other company was a private company cannot be recovered, then every person, who was a director of private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such  tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the Company.

It means a director of a private limited company is personally liable for tax due of any previous year during which he was director of the company. The revenue in many cases applied principal of lifting corporate veil, in which the principal controlling and beneficial person is identified, who are controlling affairs of the Company.  As we know that majority of private limited companies are owned by families and some of them are closely held companies. In these cases, directors/shareholders/members of company cannot hide behind corporate veil of company.

A Company as defined, is a separate entity than its members, having right to sue and be sued, right to have assets, create liabilities and appoint directors to run its business. A company works through natural persons and the liability of members are limited to the nominal value of shares they have taken and allotted by the company.

But in cases of fraud, misfeasance or breach of provisions of applicable laws, revenue has right to lift the corporate veil to find out controlling and beneficial person behind the company and recover tax dues from their personal assets.

If a director proves before the authority that he has taken all reasonable steps to pay taxes, but non-recovery of tax dues cannot be attributable to any gross neglect, misfeasance or breach of any duty on his part in relation to the affairs of the company.

Note: Tax Dues includes any penalty, fees and interest or any other sum payable under Act.

Section 179 of Income Tax Act, 1961: Pravin Bhai M. Khem Vs. ACIT(2013)213 Taxmman 82(Guj) provisions not applied to a public limited company, but where a public company was only a conduit for creation of unaccounted money and appropriating , its directors-cum-shareholders ,who were 7 in members and all of them being family members, it was held that if these facts are duly established, principal lifting of corporate veil should be applied and by application of Section 179 of the Act, recovery of tax due of the Company can be sought from the directors .

Padma Shri Devji Vithlani Vs. CIT (2014)44 Taxmann 231(Guj):  it was held that the first and foremost requirement of applicability of Section 179 of Income Tax Act, 1961 is that director from whom such recovery is sought to be made is a director of the Company. Where the assessee joined the company as a director only after it was converted into a public company, impugned order passed under Section 179 on assessee was liable to be quashed.

Jashvantlal Natvarlal Kansara Vs. ITO(2014) 362 ITR 115(GUJ): where it was established from material on record that there was no gross neglect, misfeasance or breach or duty on the part of assessee in relation to the affairs of the company , it was held that the given impugned order under Section 179(1) of Income Tax Act, 1961 liable to be  quashed.

Liability of directors for tax dues of a private limited company arises only when the arrears cannot be recovered from the Company.

Dipak Dutta Vs. UOI (2014) 286ITR302(Cal):  it was held that every person who was director of a private limited company during the relevant year can be made jointly or severally liable to pay the arrears of tax provided that the Income Tax Department is unable to recover outstanding taxes from the Company.

The Department have to prove in these cases that they have taken all steps to recover tax dues from company, but failed. Any action under provisions of Section 179 of Income Tax Act, 1961, without establishing that tax dues cannot be recovered by the Company is invalid.

If an assessing officer (AO) has not taken all steps to recover tax due from company, he cannot issue notice or take action against directors of the Company, under Section 179.

H. Ebrahim Vs. DCIT(Kar)2009 Taxmann 185:  it was held that for invoking Section 179 it not necessary all three ingredients i.e. gross neglect, misfeasance and breach of duty are satisfied. It is sufficient, if it is held that there is gross neglect, or misfeasance or breach of duty on the part of directors in the affairs of the Company. Thus, where a company has not filed returns for a period of 10 years and not in a position to pay taxes as demanded by the revenue. In this case it could be said that there was gross negligence on the part of directors and provisions of Section 179 can be imposed on them.

Conclusion:  A Company incorporated under provisions of Companies Act, 1956/2013 is a separate corporate entity other than its members. It has its own rights and powers such as right to have assets and liabilities, to sue and sued on its own name. The liability of members, limited to nominal value of shares allotted to them. There are two types of companies, Private and Public. A Private Company in which number of members are limited and various provisions of Companies Act, 2013 are not applicable to them. They are generally controlled by family members, close relatives or friends. We can easily find their beneficial owners, who controls these companies. In case these companies are not able to pay tax dues, then revenue can ask from their directors to pay the taxes. But for revenue it is necessary to take all steps to recover tax dues from the company. Now if in case of gross negligence, misfeasance or breach of duty by directors in affairs of company proved, then directors are personally liable to pay the tax dues from their personal assets.

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.

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