Mismatch between IBC and tax law clouds loss carry-forward benefits
Apr 29, 2026
A growing mismatch between insolvency and tax laws is raising uncertainty for companies, with tax authorities denying loss carry-forward benefits despite approved resolution plans
A growing conflict between insolvency law and tax rules is creating fresh uncertainty for companies undergoing resolution, with tax authorities increasingly denying the benefit of carrying forward past losses even after approval of plans by the National Company Law Tribunal (NCLT), experts said.
Under the Insolvency and Bankruptcy Code (IBC), stressed companies are taken over by new owners through a resolution process. These buyers often factor in accumulated losses of the company, as such losses can reduce future tax liability. However, this benefit is now being questioned.
Explaining the issue, Vivek Jalan, partner at Tax Connect Advisory, said the Income-tax Act generally does not allow companies to carry forward losses if there is a major change in shareholding. Under Section 79 of the Income-tax Act, 1961, companies are generally not allowed to carry forward losses if more than 51 per cent of their shareholding changes, a situation common in insolvency cases.
“To support insolvency resolutions, an exception was introduced allowing such losses to be retained if the change in ownership happens through an approved IBC resolution plan,” he said. But this relief comes with a condition.
“The law requires that the jurisdictional tax officer must be given a reasonable opportunity to present their views before the resolution plan is approved,” Jalan noted. In several cases, tax authorities are denying the benefit on the ground that they were not formally notified or made part of the insolvency process.
This means that even if a resolution plan has been cleared by the NCLT, companies may still lose the ability to use past losses if procedural requirements are seen as unmet.
An email sent to the Finance Ministry remained unanswered till the publishing of this news.
Experts say the root of the problem lies in a lack of alignment between the two laws.
Parag Rathi, partner with Rathi Rathi and Co, said the inconsistency stems from a gap in legal design. “The tax law requires that authorities be heard, but the insolvency framework does not specifically mandate that tax officials be notified before a plan is approved,” he said.
At the same time, once a resolution plan is approved, it is binding on all stakeholders, including tax authorities. “By insisting on strict compliance with tax provisions, authorities are effectively introducing a condition not envisaged under the IBC, creating uncertainty for resolution applicants,” Rathi added.
This issue became clear after the Supreme Court’s ruling in the Ghanshyam Mishra case in April 2021. The court said once an IBC resolution plan is approved, it is final and binding on everyone, including the tax department. However, in the JSW Steel case decided by the Income Tax Appellate Tribunal (ITAT), Mumbai, on December 31, 2025, the tribunal said the resolution plan does not automatically give the company the right to carry forward losses. The tax department must still get a proper hearing under Section 79, as required by the Income-tax Act.
According to Abhishek A Rastogi, this disconnect is creating uncertainty for bidders, who may now need to factor in the risk of losing expected tax benefits while valuing distressed companies. He suggests that clearer rules or amendments may be needed to ensure that the insolvency process remains predictable and that such disputes do not discourage participation in stressed asset resolutions.
[The Business Standard]
