Liability of directors of private company under section 179 of Income Tax Act & recent case law

Liability of directors of private company under section 179 of Income Tax Act & recent case law

Background

A private limited company is a separate legal entity and separate from its members. The liabilities of its members are limited to the extent of subscribed share capital. But the operations of a company are managed by natural persons, called directors. Therefore, the directors are responsible for management of affairs of the company as they are the true mind behind all decisions taken by the company.

Provision

The provisions of Section 179 of the Income Tax Act, 1961 provides that 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 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 the 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 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.

Key Points

√ Provision of section 179 is applicable only to directors of private limited companies.

√ Every director is jointly and severally liable for tax of previous year during which they were directors.

√ Directors are liable to pay tax only if recovery of tax is not possible from the company.

Recent case law

Rajendra R Singh vs Assistant Commissioner of Income Tax (Bombay High Court 26-07-2022)

– AO served notice on assessee being director of private company under section 179 for payment of certain amount for which demand was outstanding since long.

– AO has further rejected contentions raised by assessee and passed an order under section 179 holding assessee liable to pay such demand with interest.

– Provision of section 179 attracts only if tax dues can not be recovered from company.

– Show cause notice served upon assessee clears it that there is no satisfactory record regarding not possibility of recovering tax amount.

– High court held that AO can not recover tax amount from director without recording satisfaction that demand is irrecoverable from company.