Section 322 of the Income-tax Act, 2025 — Assessment and Tax Recovery from a Company in Liquidation (Liquidator's Duties)

In plain language

What Section 322 is about

Section 322 of the Income-tax Act, 2025 is the provision that protects the Government's tax revenue when a company is being wound up (liquidated). When a company shuts down, its assets are sold and the money is distributed to creditors and shareholders. Section 322 makes sure that income-tax dues of the company are not quietly ignored in that process by placing specific duties — and personal liability — on the liquidator who controls the company's assets.

This section is the 2025 Act's re-enactment of the old Section 178 of the Income-tax Act, 1961. The substance is almost identical; only the numbering and drafting have been modernised. So all the practice, circulars and case law built around Section 178 remain highly relevant.

Note on classification: although some indexes tag this provision under "trusts/charitable," Section 322 has nothing to do with trusts. It squarely deals with companies in liquidation and the liquidator's tax obligations.

Who it applies to

• Liquidators appointed when a company is wound up — whether by court order, voluntary winding up, or under the Companies Act, 2013.
• Receivers of the assets of a company appointed by a court, who are treated on the same footing as liquidators.
• Where more than one liquidator is appointed, the duties and liabilities attach to all of them jointly and severally — the Department can recover from any one of them.

The core duties of the liquidator

• Duty 1 — Notice of appointment (within 30 days): Every liquidator must, within 30 days of becoming liquidator, give written notice of the appointment to the Assessing Officer (AO) who has jurisdiction over the company.
• Duty 2 — Wait for the AO's figure (3 months): The AO must, within 3 months of receiving that notice, tell the liquidator the amount that in the AO's opinion is sufficient to cover any tax that is then payable or is likely to become payable by the company.
• Duty 3 — Set aside that amount: On being notified, the liquidator must set aside the specified sum out of the company's assets before distributing anything else.
• Duty 4 — Do not part with assets prematurely: Until the AO notifies the amount (or the 3 months pass), the liquidator must not, without the leave of the Principal Chief Commissioner / Chief Commissioner, part with any of the company's assets.

Permitted payments (the exceptions)

The restriction on parting with assets does not block the liquidator from paying:

• the tax payable by the company itself;
• secured creditors whose debts, as on the date of liquidation, rank in priority over Government dues under the general law; and
• reasonable costs and expenses of the winding up, as the Commissioner considers reasonable.

Personal liability of the liquidator

This is the teeth of the section. If the liquidator:

• fails to give the 30-day notice, or
• fails to set aside the notified amount, or
• parts with assets in breach of the section,

then the liquidator becomes personally liable to pay the tax the company would have owed. If the AO had already notified a specific amount, the personal liability is capped at that notified amount. In effect, a liquidator who distributes money to shareholders while a tax demand is looming can be made to pay out of their own pocket.

How it interacts with the IBC, 2016 — the most important practical point

For companies in liquidation under the Insolvency and Bankruptcy Code, 2016 (IBC), the priority claimed under Section 322 gives way to the IBC's "waterfall" mechanism in Section 53 of the IBC. Courts (notably the Telangana & AP High Court in Leo Edibles & Fats Ltd v. Tax Recovery Officer) held under old Section 178 that once a company is in IBC liquidation, the Income-tax Department cannot claim priority for its dues — it ranks as an ordinary/operational creditor under Section 53. Section 322 continues this position: it operates "notwithstanding any other law," subject to the IBC. So for IBC cases the Section 53 waterfall prevails.

Practical implications

• Company law/voluntary winding-up (outside IBC) → Section 322 fully applies; liquidator must follow the 30-day/3-month drill and set aside tax.
• Corporate insolvency under IBC → the IBC waterfall governs distribution; Section 322 yields to it.
• Liquidators should always file the notice and obtain a No-Objection/clearance before distributing to shareholders to avoid personal liability.