Can Tax Refunds Be Set Off Against Dues During the IBC Moratorium? The Kotak Urja Ruling and 2026 Law

Tax authorities routinely adjust a refund due to a taxpayer against outstanding tax demands of the same taxpayer. When the taxpayer is a company undergoing corporate insolvency resolution process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”), however, the set-off of a tax refund raises a different legal question because the adjustment may conflict with the moratorium and the principle of collective distribution among creditors. A frequently litigated issue is the period after the statutory time for the CIRP has expired but before the National Company Law Tribunal (“NCLT”) passes a liquidation order. The National Company Law Appellate Tribunal (“NCLAT”) considered this issue in Devarajan Raman, Liquidator of Kotak Urja Pvt. Ltd. v. Principal Commissioner of Income Tax, and subsequent amendments to the IBC have further shaped the legal position.

The Kotak Urja NCLAT Decision on Tax Refund Set-Off

Facts. Kotak Urja Pvt. Ltd. was admitted into CIRP on 18 November 2019, and a moratorium was declared. The Income Tax Department filed its claim of about ₹11.59 crore with the resolution professional in January 2020. The permitted CIRP period, including the extension and the exclusion of the COVID-19 period, was treated as having ended on 21 December 2020. Before the liquidation order was passed on 3 October 2022, the Department adjusted an income tax refund of ₹90,42,174 due to the corporate debtor against its outstanding tax demands during the CIRP moratorium. The NCLT, Mumbai Bench declined to direct repayment by order dated 16 June 2023.

Appeal. In Company Appeal (AT) (Insolvency) No. 977 of 2023, decided on 24 May 2024, a Bench comprising Justice Ashok Bhushan (Chairperson), Barun Mitra and Arun Baroka (Members, Technical) allowed the liquidator’s appeal.

What the NCLAT Held on Tax Refund Set-Off During the IBC Moratorium?

1. The moratorium continued until the liquidation order. Section 14(4) provides that the moratorium has effect until completion of the CIRP, and its proviso states that it ceases on approval of a resolution plan or on the passing of a liquidation order. The NCLAT held that expiry of the permitted time did not end the CIRP or the moratorium. Since neither event had occurred when the adjustment was made, the moratorium was in force.

2. Insolvency set-off is not available during CIRP. The NCLAT relied on the Supreme Court’s decision in Bharti Airtel Ltd. v. Vijaykumar V. Iyer (3 January 2024), which held that the provisions governing CIRP do not recognise insolvency set-off, and that Regulation 29 of the IBBI (Liquidation Process) Regulations, 2016, which provides for set-off of mutual dealings, applies only in liquidation. It could not be invoked in the interval before a liquidation order.

3. Realisation of security is a liquidation right. A secured creditor’s option under Section 52 to realise its security arises only after liquidation commences with an order under Section 33.

4. The Department was not a secured creditor. The Department relied on State Tax Officer v. Rainbow Papers Ltd. (Supreme Court, 6 September 2022), where a statutory charge under the Gujarat Value Added Tax Act, 2003 was treated as security interest. The NCLAT noted that in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. (Supreme Court, 17 July 2023), the ratio of Rainbow Papers was confined to its facts, and found no comparable statutory basis for treating the Income Tax Department as secured.

Result. The adjustment reduced the pool available to all creditors and amounted to a recovery in breach of the moratorium, with the effect of a preference. The Department was directed to refund ₹90,42,174 to the liquidator within two weeks, with liberty to file its claim in the liquidation.

How the Law has Moved Since 2024

The Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026), largely in force from 26 May 2026, reinforces the outcome in Kotak Urja and addresses some questions that had remained open.

Statutory dues and “security interest”. An Explanation to Section 3(31) now provides that a security interest exists only if it is created by agreement or arrangement between two or more parties, and not merely by operation of law. Charges arising solely under a tax statute are therefore not security interests for IBC purposes.

Priority of Government dues in liquidation. An Explanation to Section 53(1)(e)(i) provides that amounts due to the Central and State Governments for the whole or any part of the two years preceding the liquidation commencement date are distributed under that sub-clause, whether or not secured by agreement or by operation of law, and any remaining Government dues fall under clause (f). The debate generated by Rainbow Papers about statutory charges ranking with secured creditors is, for liquidations under the amended Code, resolved by statute.

Shortening the interregnum. New Section 33(2A) requires the Adjudicating Authority to pass a liquidation order within thirty days of receiving the intimation or application, recording reasons for any delay. New Section 33(1)(b)(iv) requires the liquidation order to declare a moratorium, subject to Section 52. These changes aim to reduce the gap in which disputes like Kotak Urja arise, though they do not alter the principle that the CIRP moratorium lasts until a plan is approved or a liquidation order is passed.

Consequences of breaching the moratorium. New Section 67B permits the Adjudicating Authority, on an application by the Insolvency and Bankruptcy Board of India, the Central Government or an authorised person, to impose a penalty of not less than ₹1 lakh and up to ₹2 crore for contravention of Section 14. The criminal offence previously in Section 74 has been omitted. How Section 67B will be applied to action by a government department has not yet been tested in reported decisions.

The Income Tax Provision

Refund set-off was governed by Section 245 of the Income-tax Act, 1961 when Kotak Urja was decided. The Income-tax Act, 2025 came into force on 1 April 2026 and repealed the 1961 Act, subject to savings in Section 536. The corresponding power is in Section 438 of the 2025 Act, which allows the tax authority to set off an income tax refund against outstanding tax dues after written intimation. Section 238 of the IBC gives the Code overriding effect over inconsistent laws, and the reasoning in Kotak Urja and Bharti Airtel indicates that this tax refund set-off cannot be exercised against a corporate debtor during the CIRP moratorium.

Practical Points

• A refund due to a corporate debtor during CIRP is an asset of the corporate debtor and forms part of the pool for collective distribution.
• Expiry of the CIRP timeline does not by itself end the moratorium; it ends on approval of a plan or a liquidation order.
• Tax authorities are expected to file claims in the CIRP or liquidation, where Government dues rank as provided in Section 53.
• Tax refund set-off is not available as a CIRP remedy, while Regulation 29, as interpreted in Bharti Airtel, permits set-off of mutual dealings in liquidation.

Legal Information Disclaimer

This article provides general information about Indian law as it stood on 16 September 2026. It is not legal advice, and reading it does not create an advocate–client relationship. Statutes, rules and judicial interpretations change, and their application depends on the facts of each matter. Readers should consult the current official text of the laws and judgments cited and should not act on this information without advice specific to their circumstances. This article is published for legal awareness and education and is not intended to advertise or solicit professional work.

Sources / Authorities

1. Devarajan Raman, Liquidator of Kotak Urja Pvt. Ltd. v. Principal Commissioner of Income Tax (Mumbai-1) & Ors., Company Appeal (AT) (Insolvency) No. 977 of 2023, NCLAT, Principal Bench, New Delhi, 24 May 2024 — summary, IBC Laws
2. Insolvency and Bankruptcy Code, 2016 — Sections 3(31), 14, 33, 52, 53, 67B, 238 (as amended) — IBBI – Legal Framework
3. Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026), clauses 2, 20, 32, 48 and 49 — Gazette text (IBBI); Notification S.O. 2625(E) dated 22 May 2026 — IBBI
4. IBBI (Liquidation Process) Regulations, 2016 — Regulation 29
5. Income-tax Act, 2025 (No. 30 of 2025) — Sections 438 and 536; Income-tax Act, 1961 — Section 245 — Income Tax Department
6. Press Information Bureau, “Income-tax Act, 2025 comes into force from today (1st April, 2026)” — PIB
7. Bharti Airtel Ltd. v. Vijaykumar V. Iyer, 2024 INSC 15, Civil Appeal Nos. 3088–3089 of 2020, Supreme Court of India, 3 January 2024 — Indian Kanoon
8. State Tax Officer v. Rainbow Papers Ltd., Civil Appeal No. 1661 of 2020, Supreme Court of India, 6 September 2022
9. Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd., Civil Appeal No. 7976 of 2019, Supreme Court of India, 17 July 2023 — IBBI copy

[Full Judgement]