IBC-tax law mismatch clouds loss carry-forward benefits: Experts | Economy & Policy News – Business Standard

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Under the Insolvency and Bankruptcy Code (IBC), financially stressed companies can be taken over by new owners through a resolution process

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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 resolution plans have been approved by the National Company Law Tribunal (NCLT), according to experts.

Under the Insolvency and Bankruptcy Code (IBC), financially stressed companies can be taken over by new owners through a resolution process. Buyers often take into account the accumulated losses of these companies, as such losses can help reduce future tax liabilities. However, experts say this benefit is now being brought into question.

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 typically barred from carrying forward losses if more than 51 per cent of their shareholding changes, a situation commonly seen 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. However, he added that the 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 said. In several cases, tax authorities have denied the benefit on the grounds that they were not formally notified or included in the insolvency process.

As a result, even where a resolution plan has been approved by the NCLT, companies may still lose the ability to use past losses if procedural requirements are considered not to have been met.

An email sent to the Finance Ministry in this connection remained unanswered at the time of publication.

Experts say the issue stems from a lack of alignment between insolvency and tax laws. Parag Rathi, partner at Rathi Rathi and Co, said the inconsistency arises 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 becomes 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.

In April 2021, the Supreme Court in the Ghanshyam Mishra case held that once an IBC resolution plan is approved, it is final and binding on all parties, including the tax department.

However, in the JSW Steel case decided by the Income Tax Appellate Tribunal, Mumbai, on December 21, 2025, the tribunal ruled that approval of a resolution plan does not automatically entitle a company to carry forward losses. It said the tax department must still be given a proper hearing under Section 79 of the Income-Tax Act.

According to Abhishek A Rastogi, the disconnect is creating uncertainty for bidders, who may now need to factor in the risk of losing expected tax benefits when valuing distressed companies. He said clearer rules or amendments may be needed to ensure the insolvency process remains predictable and that such disputes do not discourage participation in the resolution of stressed assets.