Section 323 Income Tax Act 2025: When Are Directors Liable for Company Tax?

Can the income-tax department recover a private company's unpaid tax from its directors? Section 323 specifies when directors may be jointly and severally liable, the tax years covered, and the defence available to a director.

Can directors be made personally liable for a private company's unpaid income tax?

Yes, subject to the conditions and defence in Section 323. The provision applies where tax due from a private company cannot be recovered. It also covers tax due from another company for income of a tax year during which that company was a private company. A person who served as director of the private company at any time during the relevant tax year is then jointly and severally liable, unless the person proves the statutory defence.

The provision expressly operates irrespective of anything contained in the Companies Act, 2013. It does not say that every director is automatically liable merely because the company has an outstanding demand: the non-recovery condition and the director's opportunity to establish the defence remain central.

Section 323(1): Conditions for personal liability and the director's defence

1. Which companies are covered?

Section 323(1)(a) covers tax due from a private company in respect of income of any tax year. Section 323(1)(b) also covers tax due from any other company in respect of income of a tax year during which that company was a private company. Thus, a later change in company status does not, by itself, remove the relevance of its private-company status during the tax year concerned.

2. Must recovery from the company have failed?

Yes. The operative condition is that the tax due cannot be recovered from the company. When considering a demand against a director, the factual and documentary basis for treating company tax as unrecoverable is therefore important.

3. Which directors are potentially liable?

Every person who was a director at any time during the relevant tax year falls within the statutory description. The section does not restrict this category to persons who were directors on the date of the tax demand or the date of recovery proceedings.

4. What does joint and several liability mean?

Under the provision, liability is joint and several: it is not automatically divided into equal shares among directors. The statutory defence must be assessed for each director on the facts.

5. How can a director avoid personal liability?

The section permits a director to avoid liability by proving that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on the director's part in relation to the company's affairs. The wording places the burden of establishing this defence on the director.

Section 323(2): Does "tax due" include penalties and interest?

Yes. Section 323(2) expressly states that, for this section, "tax due" includes penalty, interest, fees or any other sum payable under the Act. Accordingly, the statutory exposure is not confined to the principal income-tax amount.

Relevant statutory definitions and legal expressions

Practical example: Former director of a private company

Suppose a company was private during tax year 2026-27, and a person served as its director for part of that year before resigning. If tax relating to the company's income for that year cannot be recovered from the company, Section 323 may apply even though the person resigned before the recovery action. The director may resist personal liability by proving that non-recovery was not attributable to gross neglect, misfeasance or breach of duty on that director's part. A resignation alone is not the defence stated in the section.

Frequently asked questions

Is every director liable whenever a private company fails to pay tax?

No. Section 323 requires that the tax due cannot be recovered from the company, and it provides a defence to a director who proves the specified absence of fault.

Can a former director be liable?

Yes, potentially. The section covers a person who was a director at any time during the relevant tax year, subject to the other conditions and the statutory defence.

Does the section apply if the company later ceases to be private?

It may. Section 323(1)(b) expressly refers to tax due from another company for income of a tax year during which that company was a private company.

Does liability extend to interest and penalties?

Yes. Section 323(2) expressly includes penalty, interest, fees and any other sum payable under the Act within "tax due".

Who must prove that the director was not responsible for non-recovery?

The director must prove that non-recovery cannot be attributed to gross neglect, misfeasance or breach of duty on the director's part concerning the company's affairs.

Statutory text and further reading

This explanation follows the text of Section 323 in the Income-tax Act, 2025, as amended by the Finance Act, 2026. It is general legal information and does not substitute for examination of the tax demand, recovery history and director-specific evidence.

Reviewed: 12 November 2026.