Meaning of Private Company

The term private company has been used in certain provisions 1 of the act, however
this had not been defined in the act. For the purpose of section 115JAA and section
47(xiiib) definition of the term private company adopted in the Limited Liability
Partnership Act, 2008 (LLP Act) is adopted. The LLP act does not specifically define
the term ‘private company’, instead Third Schedule of the LLP Act, dealing with the
provisions on conversion of a private company into a LLP defines the term
“company” to mean a private company as defined in clause (iii) of sub-section (1)
of section 3 of the Companies Act, 1956. Further section however Sec 2 (?) of the
LLP act provides that the meanings of the terms not defined in the LLP act should
be adopted for the companies act 1956. Accordingly, the definition of the term
private company from the Companies Act 1956 is adopted for the purpose of Sec
115JAA and Sec 47(XIIxiiiBb).

For the other occurrence of the term private company in the Income Tax Act, no
meaning has been adopted. However, it can be observed that Appendix A of the
Income Tax Act reproduces certain provisions of other laws including the definition
of the term private company from Sec 2(68) of the Companies Act 2013.

From the above it can be asserted that the definition of certain private company \as
contained in sec 2(68) of the companies act 2013 would be most relevant.

The term private company is defined in the Companies Act 2013 as follows:

“private company” means a company having a minimum paid-up share capital as

may be prescribed, and which by its articles,— (i) restricts the right to transfer its
shares; (ii) except in case of One Person Company, limits the number of its
members to two hundred: Provided that where two or more persons hold one or
more shares in a company jointly, they shall, for the purposes of this clause, be
treated as a single member:Alpa to copy

Provided further that— (A) persons who are in the employment of the company;
and (B) persons who, having been formerly in the employment of the company,
were members of the company while in that employment and have continued to be
members after the employment ceased, shall not be included in the number of

1
Section 115JAA, Section 72A, Section 35DDA, Sub Section 4A (4A), Section 47(xiii XII Bb),
Section 43 (6), explanation 2C and Section 2(18)
members; and (iii) prohibits any invitation to the public to subscribe for any
securities of the company;”
Possible approaches

Having noted that the definition contained in Sec 2(68) of the Companies Act could
be most relevant, the following 2 approaches can be considered:

Approach 1

Under this approach a foreign company will not qualify as a private company for the
purpose of sectionSec 179. This is on the basis that a foreign company would not
qualify as a company for the purpose of Sec section 2(68) of the Companies Act
and accordingly the requirements of Sec section 2(68) areis not satisfied.

Approach 2

Under this approach the definition contained in section 2(68) is not to be applied as
it is. This definition is to be applied takingen into consideration the fact that a
foreign company is treated as a company for the purpose of Income Tax Act 1961.
Accordingly when the definition of the term private company is to be applied for the
purpose of the Income Tax Act, a foreign company is to be treated as a company.
Under this approach a foreign company could qualify as a private company if the
conditions contained in the clauses (Clauses i1, 2ii, 3iii) are satisfied.

The intention behind Sec section 179 is to protect the interest of the revenue by
making the directors of the private company liable to pay tax. Having noted that a
foreign company is to be treated as a company for the purpose of the Companies
Act, it would be reasonable to expect that the purpose was to be achieved by Sec
section 179 would be applicable for foreign company as well.
Guidance from Kanga Palkhiwala

Section 179 refers to a private company or a deemed public company under section
43A of erstwhile Companies Act, 1956. The word “company” defined under section
2(17) includes a body corporate incorporated under the laws of a country outside
India. The Act also defines a domestic company under section 2(22A) to mean an
Indian company or any other company which has made arrangements for
declaration of dividends in India. A foreign company under section 2(23A) is a
company which is not a domestic company. Keeping in mind the text and context of
the word private company and deemed public company occurring in section 179 it
is submitted that section 179 will not apply to a foreign company and enable the
department to proceed against its directors. This view is further endorsed by the
fact that section 179 refers to the Companies Act 1956 [now to be read as 2013
Act]. Both the Companies Act, 1956 and Companies Act, 2013 define the term
private company, by reason thereof, it is quite evident that it was the intention of
the legislature when using the word private company in section 179 that it meant a
private company incorporated under the Indian Companies Act, 1956 or Companies
Act, 2013 as the case may be.

Conclusion

Alpa to type Considering the intent of the section, Approach 2 appears to be a

better view. Having said this, the section does not require the directors of a private
company to carry out any day to day obligations, hence, no action as such is
required to be carried out by the directors. In case, at any time, if action is taken
against directors of a foreign company under section 179, Approach 1 may be used
as a defense.