[Opinion] Legal Provisions Relating to Recovery of Tax from Directors of Private Companies & Prosecution of Directors

CA V K Subramani – [2023] 154 taxmann.com 26 (Article)

Payment of correct amount of tax on the income by the taxpayers is what the Government expects but the realities are somewhat different. The taxpayers pay tax on the income admitted by them and the issues surrounding the term ‘income’ is the bone of contention which always eludes consensus among the stakeholders. Once ‘tax arrears’ is determined by the Department it becomes a definite headache for the taxpayer to get it knocked off by payment of such amount or through appellate order for its strike off. Nowadays, even meagre amounts of arrear when promptly paid by the taxpayers the tax arrears continue to stare at them for the reasons best to known to CPC and the Department. It has become a wise move, not to pay the arrears of tax but make excess payment of tax in the subsequent assessment year to result in refund so that the arrears of tax are adjusted by the CPC itself. This seems to be an effective remedy instead of paying the tax demand and being upset that the arrear is not cancelled despite payment. However, this approach would entail interest cost @12% per annum which the assessee can afford considering the certainty of arrears of tax being adjusted by the CPC without any effort for its removal by the taxpayers.

In this background of such docile work culture, the taxpayers are directed to pay 20% of the demand before preferring appeal against the assessment with a caveat that in the case of high-pitched assessment it may be waived subject to conditions contained therein. (Refer CBDT Office Memorandum No. 404/72/93 -ITCC dt.29-2-2016; Flipkart India (P.) Ltd. v. Asstt. CIT [2017] 79 taxmann.com 159/248 Taxman 555/396 ITR 551 (Kar.); Dabur India Ltd v. CIT (TDS) [2023] 146 taxmann.com 315/291 Taxman 3 (Delhi); and Paulson Litho Works v. ITO [1994] 76 Taxman 294/208 ITR 676 (Mad).

Recently, Gujarat High Court in Devendra Babulal Jain v. ITO [2023] 450 ITR 520 (Guj.) and Delhi High Court in the case of Vipul Aggarwal v. ITO [2022] 143 taxmann.com 237/289 Taxman 474/[2023] 450 ITR 254 dealt with recovery of tax from the directors when it is due from the private companies and the prosecution of directors respectively.

Liability of directors of private company-section 179

This section starts with a non-obstante clause by stating that notwithstanding anything contained in the Companies Act, 2013 where any tax is due from a private company in respect of any previous year and it could not be recovered, then, every person who was a director of the private company at any time during the previous year to which the tax demand relates shall be jointly and severally liable for payment of such tax. However, if such director 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, he shall not be liable for the tax arrears.

Even where a private company is converted into a public company and the tax arrears relate to the period i.e. previous year when it was a private company, the provisions of this section would apply for recovery of tax.

The amount of tax arrears would include penalty, interest, fees or any other sum payable under the Act. In the light of this legal provision, let us see how the Gujarat High Court decided Devendra Babulal Jain’s case (supra).

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