Section 179 deals with the vicarious liability of the Directors of private company. It states as under:-
“179(1) – Notwithstanding anything contained in the Companies Act 1956 where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous 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 previous 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”.
It appears from the aforesaid provision that the Directors of the private company are vicariously liable for the dues of the said company.
In so far as “tax due” is concerned, the earlier view of the various Courts was that the phrase “tax due” does not comprehend within its ambit the penalty and interest. However, an Explanation is inserted in section 179 defining the term “tax due” by the Finance Act 2013 w.e.f. 01.06.2013. It states that “for the purposes of this section, the expression “tax due” includes penalty, interest, fees or any other sum payable under the Act.” The word “fees” is inserted by the Finance Act 2022 w.e.f. 01.04.2022. The definition of the term “tax due” is inclusive and not exhaustive. Thus it includes within its ambit all the dues by whatever name called within its ambit. Though the definition is clarificatory in nature, it cannot have retrospective effect as it affects the rights of the Directors. It creates the liability in the hands of Directors of substantive nature and therefore, it should have prospective effect.
In so far as liability of the Director is concerned, the Director has to prove that non-recovery of tax cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the defaulting company. The onus to prove such fact is upon the Director. Once the Director furnishes before the Authority, the material and reasons as to why non-recovery cannot be attributed to any of the three factors on his part, the Authority is bound to examine such grounds and has to pass a reasoned order in this respect. Moreover, Legislature in its wisdom has used the words “gross neglect” and not mere neglect on the part of Directors.
In Prakash B Kamat v. Pr. CIT (2023) 457 ITR 150 (Bom), Bombay High Court have held, it is a settled position of law that in the absence of any specific provisions in the statute, duty or penalty, liability of the company cannot be recovered from its Director, who is not personally liable towards the liability of the company. Section 179(1) provides for an escape route to the Director. It says that where a Director proves that non-recovery of tax dues cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company, he shall not be liable for payment of tax dues. Of course, the responsibility of establishing such fact is upon the Director. Once the Director places before the Authority his material, the Authority is bound to examine such grounds and come to a reasoned conclusion. Hon’ble Bombay High Court, while arriving at such conclusion, has considered other various judgments of various High Courts.
The recent judgement is rendered by Gujarat High Court in the case of Kushal Vinod Chandra Mehta v. ITO (2023) 458 ITR 359 (Guj). Gujarat High Court have held that section 179(1) provides for joint and several liability of the Directors of a private company wherein the tax due from such company in respect of any income of any previous year cannot be recovered. The first requirement, therefore, to attract such liability of the Director is that the tax cannot be recovered from the company itself. This is a pre-requisite and a necessary condition to be fulfilled before action u/s 179 can be taken. However if the Director establishes that the non-recovery of the tax cannot be attributed to his gross neglect etc., his liability u/s 179(1) of the Act would not arise. It is the subjective satisfaction of the authority concerned that is important and it should be reflected from the order itself based on cogent material.
Accordingly, the Director’s liability of a private company u/s 179(1) is subject to conditions prescribed therein. It cannot be outrightly said that the Directors of a private company are jointly and severally liable for the dues of a private company.

Source : AIFTP Journal December 23