Company in Liquidation, Private Company Director Liability and Historical Copyright Royalty Rule
The Income-tax Act, 2025 continues the special tax rules for a company in liquidation and for recovery of unrecovered company tax from directors of a private company. These provisions are now contained in Sections 322 and 323. Former Section 180 concerning allocation of certain copyright royalties is historical and has no corresponding provision in the 2025 Act.
Section 322 - Company in liquidation
Section 322 regulates the income-tax responsibilities of a liquidator of a company being wound up and a receiver appointed over company assets. For this provision, both categories are treated as the liquidator.
Notice of appointment within 30 days
A liquidator or receiver must give notice of the appointment to the Assessing Officer entitled to assess the company's income within 30 days after becoming the liquidator.
Amount to be notified by Assessing Officer
After making appropriate inquiries or calling for information, the Assessing Officer must notify the liquidator, within the statutory period, of the amount considered sufficient to provide for tax then payable or likely thereafter to become payable by the company.
Restriction on disposal of company assets
Until the Assessing Officer's notification is received, the liquidator cannot part with company assets or property in hand without the leave of the specified Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner. After notification, the liquidator must set aside the notified amount and is restricted from parting with assets until that amount is set aside, subject to the statutory exceptions.
Permitted payments
The restriction does not prevent assets from being used for payment of tax payable by the company, payment to secured creditors whose debts have legal priority over Government debts on the date of liquidation, or reasonable winding-up costs and expenses within the terms of the section.
Personal liability of liquidator
If the liquidator fails to give the required notice, fails to set aside the required amount, or disposes of assets contrary to the section, personal liability can arise for tax payable by the company. Where the tax amount has been notified, the personal liability is limited in accordance with the statutory provision.
More than one liquidator
Where there is more than one liquidator, the obligations and liabilities under Section 322 attach to the liquidators jointly and severally.
Insolvency and Bankruptcy Code
Section 322 has overriding effect despite contrary provisions in other law, subject to the express exception for the Insolvency and Bankruptcy Code, 2016.
Section 323 - Liability of directors of private company
Section 323 applies where tax due from a private company, or from another company for a tax year during which it was a private company, cannot be recovered. A person who was a director of the private company at any time during the relevant tax year is then jointly and severally liable for payment, subject to the statutory defence.
Director's statutory defence
A director can avoid personal 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 affairs of the company.
Meaning of tax due
For Section 323, the expression tax due includes penalty, interest, fees and any other sum payable under the Income-tax Act.
Companies that were private companies
The provision is not limited to a company that remains private at the recovery stage. It also addresses tax due from another company for income of a tax year during which that company was a private company.
Former Section 180 - Royalties or copyright fees for literary or artistic work
Former Section 180 of the Income-tax Act, 1961 was a special historical provision for an author of a literary or artistic work where creation of the work took more than 12 months. On the author's claim, specified lump-sum consideration for assignment or grant of copyright interests, or royalties or copyright fees, could be allocated for assessment in the prescribed manner and over the prescribed period.
The former provision defined author to include a joint author and treated a non-returnable advance against royalties or copyright fees as part of the concept of lump-sum payment. However, the proviso expressly made Section 180 inapplicable to a previous year relevant to an assessment year commencing on or after 1 April 2000. It therefore has no current operative counterpart in the Income-tax Act, 2025.
1961 Act and 2025 Act correspondence
| Subject | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Company in liquidation | Section 178 | Section 322 |
| Liability of directors of private company | Section 179 | Section 323 |
| Allocation of royalties or copyright fees for literary or artistic work | Section 180 - historical; inapplicable from AY 2000-01 onward | No corresponding provision |
Practical points
- A liquidator or receiver should identify the Assessing Officer and give the statutory notice within 30 days of appointment.
- Company assets should not be distributed contrary to the restrictions in Section 322 before the tax position and required set-aside are addressed.
- Where company tax cannot be recovered, Section 323 may expose persons who were directors during the relevant tax year to joint and several liability.
- The statutory defence under Section 323 places importance on evidence concerning the director's conduct and the reasons for non-recovery.
- Former Section 180 should be presented only as historical law; current author royalty deductions must be examined under the provisions now in force, including Section 151 where applicable.
This article is a general explanation. Liquidation and director-liability cases depend on the relevant tax year, recoverability from the company, notices, asset distributions, insolvency law, the director's conduct and applicable transition provisions.