Every director of a private firm is liable for tax payment
Q: I am a director of a private company in India for the past many years, having taken up the directorship when I was resident in India. The private company is now in liquidation. I am told that tax dues of such company can also be recovered from the directors. I want some insight into this law.
A: Under section 179 of the Income-tax Act, 1961, every director of a private company is jointly and severally liable for payment of any tax due from such company. The tax includes penalty, interest or any other sum due under the Act. However, courts have taken the view that this provision should be applied only if the tax cannot be recovered first from the company. In such a case, notice must be given to the directors indicating the steps taken by the department to recover the tax from the company. The directors must be given an opportunity to give their reply or response to the notice before action can be taken for such recovery from the directors. Further, no recovery from the directors can be made if they can prove that the non-recovery cannot be attributed to any gross neglect, misfeasance, or breach of duty in relation to the affairs of the company.
Q: Several listed companies on Indian stock exchanges are not complying with listing requirements. Some stock exchanges take action against certain companies, but others go scot-free. Are regulations being tightened up?
A: New rules have been framed by the Securities & Exchange Board of India which will come into force from October 1, 2018. Stock exchanges have been directed to impose fines ranging from 1,000 Indian rupees to 5,000 Indian rupees per day in respect of violations of certain clauses of the listing agreement. These fines pertain to nonsubmission or delay in submission of documents relating to the company’s financial and shareholding details, or for failure to appoint a woman director on the board. Fine of 10,000 Indian rupees per day is to be imposed for delay in furnishing intimation about the company’s board meeting or delay in disclosure of the record date or of dividend declaration. In case fines are not paid, the stocks of such companies would be liable for restricted trading. Trading can also be suspended, and if the fine is not paid within six months from the date of suspension, the stock exchange would have to initiate the process of compulsory delisting.
Q: My family has a charitable trust in India which has been in existence for several years. No trust deed is available. However, the trust is registered with the State Wakf Board. The tax department is not allowing registration as it is insisting on filing of a trust deed. Is the tax department right in doing so?
A: Similar problem has arisen in the case of other trusts in India. Fortunately, two High Courts have given their judgment on this issue. The courts have held that a trust is eligible for registration under the relevant provisions of the Income-tax Act, 1961 if the trust has been validly created and this can be established by producing evidential documents. The Courts have noted the fact that many trusts had been created several decades ago for which no instrument, like a trust deed, was executed. If the trust is a wakf which is duly registered with a State Wakf Board, such trust should be registered under section 12-AA of the Act. The application for registration should be filed with the tax department alongwith the order passed by the State Wakf Board recognising the trust. Such order must include details of the date and number of registration, name of the trust, objects of the trust, and the names of the Mutawallis as well as the manner of appointing them. In such a case, the trust has to be registered, failing which you may file a writ petition in the High Court.