Section 179 of the Income Tax Act

It is essential for business owners to comprehend the tax rules that impact their organisations. Section 179 of the Income Tax Act is among the most crucial clauses that businesses need to understand. Public enterprises are exempt from the Income Tax Act of 1961's Section 179. Private limited corporations, publicly traded companies, and closely owned third-class public limited companies are all available in India. When authorities and courts decide to raise the corporate veil of fiction in order to examine the ground realities, namely the factors pertaining to "evasion of tax liability," these third-class corporations may face the possibility of being recognised as "private limited companies." We will examine Section 179's definition, operation, and advantages for small business owners in this blog post.

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Table of Contents:

What is Section 179 of the Income Tax Act?

Features of Section 179 of the Income Tax Act

Scope of Directors' Liability Under Section 179(1)

Who Can Be Made Liable Under Section 179

Exemption to Section 179

Conclusion

Most Asked Questions

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What is Section 179 of the Income Tax Act?

According to Section 179 of the Income Tax Act of 1961, if a private company's tax debt for any prior year's income or that of any other company for any prior year's income during which that other company was a private company cannot be recovered, then all individuals who served as directors of the private company at any point during the relevant prior year will be held jointly and severally liable for paying the tax. Unless the individual in question can demonstrate that the non-recovery cannot be attributed to any egregious negligence, misfeasance, or breach of duty on his part regarding the company's affairs, all directors of the company at the relevant time are liable. The provisions of sub-section (1) of Section 179 of the Act would not apply to a person who was a director of a private company with regard to such tax arrears prior to the first day of April, 1962, provided that the tax assessed for any prior year or during which the company was a private company cannot be recovered. This is made abundantly clear by sub-section (2) of Section 179 of the Act.

Features of Section 179 of the Income Tax Act

• Only directors of private limited businesses are subject to section 179's provisions.

• Each director is held jointly and severally accountable for taxes from the prior year in which they served as directors. 

• Directors are only required to pay taxes if the company is unable to collect them.

Scope of Directors' Liability Under Section 179(1)

It would seem from a straightforward interpretation of Section 179 of the IT Act that the strictures of the section do not apply to directors of publicly traded firms. Section 179 of the IT Act would not apply to businesses that are considered public corporations under the Companies Act. However, under Section 179 of the IT Act, the income tax authorities would have the authority to lift the corporate veil and treat the directors of a company that was incorporated as a public limited company as liable if its operations were set up to defraud the revenue and the surrounding circumstances warranted disregarding the legal structure. Since the statute's anti-avoidance provisions were implemented, the income tax authorities now have this authority based on the statute's provisions.

Who Can Be Made Liable Under Section 179

Every individual who served as a director of that corporation during the prior year about which the taxes are being sought will be held liable under Section 179. For example, even if Mr. A resigned from his position as a director in 2020, he may still be held accountable under Section 179 if he served as a director during the 2018–19 fiscal year and an additional tax demand is made for that fiscal year as a result of a tax assessment that is finished in 2021. Furthermore, the clause would apply even to persons who were initiated into the directorship during the year or who resigned from their position during the relevant prior year. Both nominated directors and directors selected by interested parties, such as a lender or technology partner, would be subject to the same rules.

Exemption to Section 179

The accusation made against the directors via Section 179 is not infallible. If a director can show that non-recovery cannot be ascribed to any egregious negligence, misconduct, or duty breach on his part regarding the company's affairs, then they will not be held liable. It goes without saying that this would primarily depend on the case's facts and circumstances as well as the elements that led to the tax demand. However, it is the director's responsibility to prove that the failure to collect money from the company cannot be attributed to the director's wilful negligence, misconduct, or breach of duty.

The facts and circumstances of the case would play a major role in establishing the director's lack of liability under Section 179. However, these justifications must be developed following the identification of the factors that have contributed to the company's financial status and the analysis of the fundamental causes that give rise to tax demand. Relevant factors would be the director's real level of involvement in decision-making, the board meeting's resolutions, and the precise roles and responsibilities that the director was given and actually performed. Remember that what needs to be proven is that there was no serious negligence, misconduct, or duty violation that resulted in the non-recovery. Therefore, it would be essential to determine the reasons behind the company's inability to pay its tax obligations and take appropriate action.

Conclusion

When a private business's unpaid tax debts cannot be recouped from the corporation, Section 179(1) gives the Department the authority to collect them from the directors. However, if the director in question can demonstrate that the lack of recovery cannot be linked to any egregious negligence, misconduct, or violation of his duties regarding the company's operations, as demonstrated in the assessee's case, then such recovery can be avoided.

FAQ

Q1. What is Section 179 1 of the Income Tax Act?

When a private company's unpaid tax debts cannot be collected from the corporation, Section 179(1) gives the Department the authority to collect them from the directors. 

Q2. What is the liability of directors under the Income Tax Act?

In a contract with the other directors, the managing director's assumption of all duties under section 179 of the Act does not release the other directors from obligation under the section. Regardless of the directors' agreement, the Revenue Authorities will have the right to pursue all of them for unpaid taxes.

Q3. Are directors personally liable for income tax?

Every individual who served as a director of that corporation during the prior year about which the taxes are being sought will be held liable under Section 179.

Q4. When is a director exempt from Section 179?

If a director can demonstrate that there was no significant wrongdoing, carelessness, or duty violation that led to the non-recovery, they are immune from Section 179.

Q5. Is Section 179 applicable to only private companies?

Yes, only directors of private limited corporations are subject to the provisions of section 179.