Liability of directors of private company
[Section-323 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 323(1) of Income Tax Act 2025
323(1) Irrespective of anything contained in the Companies Act, 2013, where any tax due from—
- (a) a private company in respect of any income of any tax year; or
- (b) any other company in respect of any income of any tax 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 tax 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.
Section 323(2) of Income Tax Act 2025
323(2) Where a private company is converted into a public company and the tax assessed in respect of any income of any tax year during which such company was a private company cannot be recovered, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax due in respect of any income of such private company assessable for any tax year commencing before the 1st April, 1961.
Section 323(3) of Income Tax Act 2025
323(3) In this section, “tax due” includes penalty, interest, fees or any other sum payable under the Act.
FAQs on Section 323 of Income Tax Act 2025
Who is liable to pay tax dues when a private company fails to do so?
Every person who was a director of the private company at any time during the relevant tax year is jointly and severally liable to pay such tax dues if the company fails to pay.
What conditions must be fulfilled for a director to avoid liability under Section 323(1)?
The director must prove that the failure to recover tax was not due to any gross neglect, misfeasance, or breach of duty on his part in relation to the affairs of the company.
Does this liability apply to directors of companies that were private in a past tax year but later became public?
Yes, if the unpaid tax relates to a tax year during which the company was private, the directors during that private period are still liable.
Is there any exception to this liability in case of conversion from private to public company?
Yes. If a private company has been converted into a public company, sub-section (1) does not apply to any director for tax dues related to income of such private company for any tax year starting before 1st April, 1961.
What is included in the term “tax due” under Section 323(3)?
“Tax due” includes not only the tax amount but also penalty, interest, fees, or any other sum payable under the Act.
Is this provision dependent on anything in the Companies Act, 2013?
No, Section 323(1) applies notwithstanding anything contained in the Companies Act, 2013.
Does joint and several liability mean each director is responsible for the entire tax due?
Yes, each such director can be held responsible for the entire unpaid amount, although they may seek indemnification among themselves separately.
Is the burden of proof on the tax authority or the director regarding negligence or breach of duty?
The burden of proof lies on the director to demonstrate that the non-recovery was not due to his gross neglect, misfeasance, or breach of duty.
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