Chapter XVII - Special Provisions Relating to Certain Persons
Section 323
Section 323: liability of directors of a private company
Section 323 can make a person who served as a director during the relevant tax year jointly and severally liable for a company's tax due if that due cannot be recovered from the company and it was private during that year. The director can prove the statutory exception concerning their own conduct.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(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.
(2) For the purposes of this section, “tax due” includes penalty, interest, fees or any other sum payable under the Act.
Introduction
Section 323 concerns recovery of tax that cannot be recovered from a private company, or from another company for a tax year in which it was private. It reaches people who were directors at any time during that relevant tax year.
The liability is joint and several, but the section provides a defence: the director can prove non-recovery was not attributable to gross neglect, misfeasance or breach of duty on their part in the company's affairs.
Key takeaways
Unrecovered company dues trigger the rule
Director liability under Section 323 arises where the specified tax due from the company cannot be recovered from it.
Relevant-year directors are covered
A person who served as a director at any time during the tax year can be jointly and severally liable, including when the company later ceased to be private.
A director has a statutory defence
The director can avoid liability by proving that non-recovery was not due to their own gross neglect, misfeasance or breach of duty.
Tax due has a wide meaning
For this section, tax due includes penalty, interest, fees and any other sum payable under the Act.
Identify the company, year and recovery condition
The company must have been private during the tax year to which the due relates, even if it later changed status. Section 323 applies where the tax due cannot be recovered from the company. A merely unpaid demand does not by itself establish that recovery condition.
Identify directors and their individual defence
Every person who was a director at any time during that relevant tax year can be jointly and severally liable. A director who relies on the statutory exception must prove that non-recovery was not attributable to their own gross neglect, misfeasance or breach of duty in the company's affairs. For this section, tax due includes penalty, interest, fees and any other sum payable under the Act.
Worked example (hypothetical)
A company was private during tax year A and later became public. A person served as director for only part of year A. If tax due for year A cannot be recovered from the company, section 323 can reach that director despite the later status change. The person's defence turns on evidence of their own conduct; the dates alone establish no liability conclusion.
Step-by-step flow for directors' liability under Section 323
- 1
Is the tax due from a private company, or from another company for a tax year in which it was a private company?
"Tax due" includes penalty, interest, fees or any other sum payable under the Act (Section 323(2)).
- No: Section 323 does not apply.
- Yes: Go to the next step.
- 2
Can the tax due be recovered from the company?
- Yes: Directors are not made liable under Section 323.
- No: Go to the next step.
- 3
Who was a director at any time during the relevant tax year?
Every such person is jointly and severally liable for the tax, irrespective of the Companies Act, 2013 (Section 323(1)).
- 4
Can the director prove that non-recovery is not due to gross neglect, misfeasance or breach of duty on his part?
- Yes: That director is not liable.
- No: That director remains jointly and severally liable for the whole amount.
Practical checklist
Do
- Keep the underlying demand and year of income, company status records for that year, and recovery correspondence or orders.
- Record appointment and resignation dates for each director during the relevant tax year.
- For a statutory defence, preserve contemporaneous board, finance and compliance records relevant to the director's own conduct.
Avoid
- Assume an unpaid demand alone proves non-recovery from the company, or that resignation before the recovery attempt removes a relevant-year director.
Illustrative example
Worked example: unpaid tax of a private company
Hypothetical facts (illustration only, not a real taxpayer): Q Pvt. Ltd. owes an assumed ₹18,00,000 of tax and interest for tax year 2026-27, which cannot be recovered from the company. Its directors during that year were A and B throughout, and C until resigning in December 2026.
Tax due
The ₹18,00,000 includes interest, which counts as tax due under Section 323(2).
Directors covered
A, B and C were each a director at some time during 2026-27, so all three are covered. C's resignation in December 2026 does not take C outside the section.
Defence
C shows that the non-recovery arose from decisions taken after the resignation and not from gross neglect, misfeasance or breach of duty on C's part. A and B cannot show this.
Result
A and B are jointly and severally liable for the full ₹18,00,000; C is not, if the proof is accepted.
Outcome
- Liability attaches to anyone who was a director at any time in the relevant tax year.
- The burden is on each director to prove that the non-recovery is not attributable to them.
Frequently asked questions
Does an unpaid company demand automatically make every director liable?
No. The statute requires that the tax due cannot be recovered from the company. It then reaches persons who were directors at any time during the relevant tax year, subject to each director's statutory defence.
Does resignation before a recovery attempt remove a director from section 323?
The membership test is whether the person was a director at any time during the relevant tax year. Resignation defines the service period and may matter to evidence; the recovery date is not the membership test.
Does 'tax due' include interest or penalty?
Yes. Subsection (2) includes penalty, interest, fees and any other sum payable under the Act.
Need help applying this provision to your situation?
Get help with director tax liability for private companiesLast updated 2026-10-10