Company in Liquidation and Director Liability for Unpaid Tax (Income Tax Act 2025)

When a company is wound up, the Income-tax Act, 2025 makes the liquidator (or a receiver of the company's assets) personally answerable for the company's tax if he distributes assets without first providing for it. Section 322 requires him to give notice of appointment to the Assessing Officer within 30 days and to set aside the amount the officer notifies. Separately, section 323 makes every director of a private company jointly and severally liable for tax that cannot be recovered from the company, unless the director proves the non-recovery is not due to gross neglect, misfeasance or breach of duty.

This guide covers both sections, with the numbers and sub-sections beside each point. The text is the Act as amended by the Finance Act, 2026, last reviewed on 10 November 2026. It is information, not legal advice. The Insolvency and Bankruptcy Code, 2016 sits outside section 322 (see below), so a company under that Code needs its own analysis.

Who is a "liquidator" under section 322?

Section 322(1) covers two kinds of person. The first is anyone who is the liquidator of a company that is being wound up, whether under a court order or otherwise (voluntary winding up included). The second is anyone appointed receiver of any assets of a company. The section calls both "the liquidator" from then on.

What must a liquidator do, and by when?

1. Give notice within 30 days. The liquidator tells the Assessing Officer who is entitled to assess the company's income, within 30 days of becoming liquidator (section 322(1)).
2. Wait for the officer's notification. The Assessing Officer may make inquiries or call for information, then notifies the amount that, in the officer's opinion, is sufficient to provide for tax that is payable or likely to become payable. This must happen within three months of receiving the notice (section 322(2)).
3. Hold back assets until then. Without the leave of the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner, the liquidator must not part with the company's assets or properties until the notification arrives (section 322(3)(a)).
4. Set aside the notified amount. Once notified, the liquidator sets aside an equal amount and cannot part with assets until he does (section 322(3)(b)).

Which payments can a liquidator still make?

Section 322(4) lets the liquidator part with assets for three purposes, even before setting aside the amount, to the extent the Commissioner-level authority considers reasonable:

• payment of the tax payable by the company;
• payments to secured creditors whose debts have legal priority over Government dues on the date of liquidation; and
• the costs and expenses of winding up.

When is a liquidator personally liable?

Under section 322(5), the liquidator becomes personally liable for the tax the company would have paid if he:

• fails to give the 30-day notice;
• fails to set aside the notified amount; or
• parts with assets in breach of section 322(3).

Where the Assessing Officer has notified an amount under section 322(2), his personal liability is limited to that amount (section 322(6)). Where there is more than one liquidator, every obligation and liability attaches to all of them jointly and severally (section 322(7)). Section 322(8) gives the section overriding effect over other laws, except the Insolvency and Bankruptcy Code, 2016.

Who is liable under section 323?

Section 323(1) applies where tax due cannot be recovered from either (a) a private company for a tax year, or (b) any other company for a tax year during which it was a private company. Every person who was a director of that company at any time during that tax year is jointly and severally liable for the tax. This applies irrespective of anything in the Companies Act, 2013.

"Tax due" is wide. Section 323(2) says it includes penalty, interest, fees or any other sum payable under the Act.

How can a director escape section 323 liability?

The director must prove 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. The burden is on the director. The Act does not define these three terms, so the facts of each case decide the outcome. Records that show what the director did and did not control are the usual starting point.

	Section 322 (liquidator)	Section 323 (director)
Who	Liquidator or receiver of company assets	Anyone who was a director of a private company during the tax year
Trigger	No notice, no set-aside, or assets released in breach	Tax due cannot be recovered from the company
Extent	Tax the company would owe; capped at the notified amount if one was notified	The tax due, including penalty, interest, fees and other sums
Defence	Comply with notice, set-aside and asset restrictions	Prove no gross neglect, misfeasance or breach of duty
Joint liability	Yes, among liquidators (322(7))	Yes, among directors (323(1))
Insolvency Code	Section 322 yields to the Code (322(8))	No such carve-out in the text of section 323

Worked example 1: what a liquidator must set aside

Assumptions (tax year 2026-27): a company is wound up voluntarily. The liquidator gives notice within 30 days. The Assessing Officer notifies Rs 18,00,000 as the amount sufficient to cover tax. The company holds Rs 75,00,000 of assets.

Step	Amount (Rs)
Company assets in the liquidator's hands	75,00,000
Less: amount notified under section 322(2), to be set aside	18,00,000
Less: winding-up costs the Commissioner treats as reasonable (section 322(4)(c))	5,00,000
Available for other distribution	52,00,000

75,00,000 - 18,00,000 - 5,00,000 = 52,00,000. If the liquidator had instead paid out the full 75,00,000 and the company's tax of 18,00,000 stayed unpaid, section 322(5) and (6) would make him personally liable up to the notified 18,00,000.

Worked example 2: how much a director can be asked to pay

Assumptions (demand for tax year 2026-27, recovery attempted later): a private company has three directors during the year. The demand outstanding is tax Rs 9,00,000, interest Rs 2,10,000 and penalty Rs 90,000. Recovery steps against the company yield nothing.

Component	Amount (Rs)
Tax	9,00,000
Interest	2,10,000
Penalty	90,000
"Tax due" under section 323(2)	12,00,000

9,00,000 + 2,10,000 + 90,000 = 12,00,000. Each of the three directors is jointly and severally liable for the whole 12,00,000, not one-third each, unless he proves the non-recovery is not attributable to his gross neglect, misfeasance or breach of duty.

Real-life example 1: Ravi, the liquidator who skipped the notice

Ravi is appointed liquidator of a closely held manufacturing company. He is busy settling suppliers and does not write to the Assessing Officer. Three months later he pays out the sale proceeds to creditors and shareholders. The company turns out to owe income tax. Because he never gave the 30-day notice and released assets without any set-aside, section 322(5) makes him personally liable for the company's tax. Since no amount was notified, the cap in section 322(6) has nothing to attach to.

Real-life example 2: Meena, the director who was not involved

Meena is a director of a private company for the whole of a tax year. The company later defaults on its tax and has no assets left. The department looks to the directors under section 323. Meena shows she held a nominal board seat, resigned in writing when she found the books were being kept from her, and raised the issue with the board. Whether that is enough is for the officer and, on appeal, the authorities to decide on the facts. The Act puts the burden of proof on her, so documents matter.

Common mistakes

• Treating notice as optional. Failing to give the 30-day notice alone triggers personal liability under section 322(5).
• Distributing before the notification. Without leave, assets cannot go out until the officer notifies the amount (section 322(3)(a)).
• Assuming only the liquidator is exposed. Section 323 separately reaches directors of a private company.
• Assuming a director who left mid-year is safe. Anyone who was a director at any time during the relevant tax year is covered.
• Ignoring interest and penalty. "Tax due" in section 323 includes them.
• Missing the Insolvency Code. Section 322(8) preserves that Code, so the order of payment in an insolvency case follows it.

Quick reference

Item	Time or limit	Provision
Liquidator's notice to Assessing Officer	30 days from becoming liquidator	322(1)
Assessing Officer notifies amount	3 months from receiving notice	322(2)
Liquidator's personal liability cap	Amount notified	322(6)
Director liability period	Any time during the relevant tax year	323(1)

Where this is in the Act

• Section 322(1): liquidator or receiver, notice within 30 days
• Section 322(2): Assessing Officer notifies amount within three months
• Section 322(3) and (4): restriction on parting with assets, and permitted payments
• Section 322(5) to (7): personal, capped and joint liability
• Section 322(8): overriding effect, except the Insolvency and Bankruptcy Code, 2016
• Section 323(1) and (2): directors of a private company, meaning of tax due

Related reading: tax recovery after a demand default, LLP liquidation and partners' liability and capital gains on liquidation distributions.

For a CA firm advising on a winding up, the risk is usually a missed date: the 30-day notice, the three-month wait, the tax year in which each director served. Finexo's practice management software lets you track those dates per client and assign them to team members. It does not give legal advice or file notices for you.