In a striking inter-ministerial divergence, the Ministry of Finance (MoF) has rejected a key recommendation made by the Ministry of Corporate Affairs (MCA) to exempt loan waivers granted under the Insolvency and Bankruptcy Code (IBC) from being treated as taxable income under the proposed Income Tax Bill, 2025.This policy discord is particularly notable given that both ministries — the Ministry of Finance and the Ministry of Corporate Affairs — are headed by the same Union Minister, Nirmala Sitharaman.
The recommendation and its rejection are recorded in the report of the Select Committee on the Income Tax Bill, 2025, tabled in Parliament on July 21. During a committee hearing held on April 17, the MCA had made a detailed case for excluding loan waivers arising from resolution plans approved under the IBC from the ambit of taxable income.
The proposal stemmed from a long-standing industry demand to make the IBC framework more attractive to resolution applicants and promote faster revival of stressed companies. The MCA argued that treating such waivers as income contradicts the very spirit of the IBC, which was envisioned as a mechanism for corporate revival, not penalisation.According to page 387 of the report, the Secretary of MCA had stated:“Then we come to the suggestion with respect to the IBC. This is an important aspect because the objective of the IBC is to essentially provide for resolution of a concern as a going concern. And we know these concerns are already reeling under losses and they handle financial stress. Prior to 2023, a loan waiver was not treated as a cash receipt and therefore was not subject to the income which is chargeable for tax. There was a Supreme Court judgment in Mahindra and Mahindra in 2018 where the waiver of loan was treated as a cash receipt. Subsequently, the amendment was brought in and it is now being proposed as a part of the Income-Tax Bill also. But our earnest request is that the waiver of loan should not be considered as an income subject to Income-Tax because that actually will really impact negatively the purpose behind the IBC. If that can be considered, it will be good.”However, the Finance Ministry rejected the plea outright, stating:“The suggestion made by the stakeholder is in the nature of policy change which is beyond the scope of the objectives of the IT Bill, 2025.”When pressed by the Committee to clarify its stance, the MoF laid out its rationale in detail:“Government has already incentivized the companies undergoing Corporate Insolvency Resolution Process (CIRP) by amending the section 79 of Income-Tax Act, 1961 which now allows to carry forward and set off the accumulated losses, even if there is a change in shareholding. Thus, a company which has undergone CIRP due to serious financial crunches should be having substantial amount of accumulated losses which can be set-off against the income arising under sections 28(iv) and 41(1) of the Income-Tax Act, 1961. On the other hand, situations, where the company was not having accumulated losses at the beginning of CIRP indicate that the company was not in serious financial trouble and in such cases exemption u/s 28(iv)/41 of Income-Tax Act’ 1961 shall be unjust enrichment.”The ministry further pointed to Indian Accounting Standards and past judicial rulings to support its decision:“Indian Accounting Standard (Ind AS) 109, para 3.3.3 also provides that upon waiver of loan, the difference between the carrying amount of loan and the consideration actually paid towards such waiver would be routed through profit and loss account. Thus, as per Ind AS also, waived amount is required to be shown as profit in the P&L account. Moreover, the Government has already foregone a major portion of statutory dues which were outstanding at the beginning of CIRP due to lower priority in waterfall mechanism. There are various judgements wherein the Courts have held that loan waived off as one time settlement will be taxable as income of the assessee.(a) Solid Containers Ltd. v. Dy. CIT (Bombay HC, 2009)(b) Logitronics (P.) Ltd. v. CIT (Delhi HC, 2011)(c) Rollatainers Ltd. v. CIT (Delhi HC, 2011)”Cracks in a jointly built frameworkThe disagreement is especially significant because the IBC itself was a product of a joint effort between the MoF and MCA in 2016, designed as a comprehensive solution for insolvency and bankruptcy resolution. The code was hailed as one of the biggest structural reforms in the financial and legal ecosystem, aimed at restoring creditor confidence, improving the ease of doing business, and rescuing viable companies.However, the current divergence indicates an evolving tension over the code’s future direction. While the MCA continues to push for policy refinement to improve IBC’s effectiveness, the MoF appears more focused on preserving the tax base and preventing what it considers “unjust enrichment.”Industry says MoF missed an opportunityTax experts and insolvency professionals say the MCA’s proposal could have addressed a key deterrent for resolution applicants — the unexpected tax liability that arises from accepting loan waivers during distressed asset purchases.Ajay Rotti, Founder of tax consultancy firm, Tax Compaas says, “The recommendation was on the basis of a long pending industry demand. However, the MoF has laid out its stand that it would not exempt loan waivers pursuant to IBC from the ambit of income tax. If it had been agreed upon, it would have helped the resolution applicants. Applicants may hesitate with resolution plans if a huge tax liability kicks in on waivers, and it also increases the post-resolution cost. Also, if the funds go in for taxes, it may mean lesser recovery for banks or lesser funds for the turnaround plans.”The current framework requires that any gain arising from the waiver of loans — even under a court- or tribunal-approved resolution plan — be reported as business income under Sections 28(iv) or 41(1) of the Income Tax Act. This has the potential to significantly increase the acquisition cost of a stressed company.What’s at stake?The decision not to exempt loan waivers may lead resolution applicants to price in the tax burden, ultimately reducing the value offered for distressed assets and, by extension, creditor recovery. In some cases, it may even render resolution plans financially unviable.Prior to 2023, such waivers were not taxed due to more favourable interpretations by courts. But with changes brought in since — and now the formalisation of taxability under the IT Bill, 2025 — that window has effectively closed.While the Finance Ministry maintains that relief under Section 79 is sufficient, industry voices argue that a broader rethinking is needed to truly incentivise stressed asset resolutions.Simply putThe clash between MoF and MCA — two wings of the government under the same leadership — brings to light the complexities of balancing economic revival and revenue protection. As India looks to push more distressed companies through resolution, the question remains whether tax policy should support or stand aside from that mission.Unless Parliament or the Cabinet reconsiders the recommendation in the final version of the IT Bill, companies acquiring assets through IBC will have to account for the tax cost of waived loans — a decision that could shape the contours of insolvency resolution in the years ahead.
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