IIS 8.5 .NET Framework 4, application fails to load with Catastrophic Error

Recently our Application was uplifted from .NET 2.0 to .NET 4.0. It's based on IIS web Server.

We install our application through wix toolset using an .MSI file.

Application installers creates new customised AppPool and also provide an option to Key in AppPool Userid and Password during installation and this turns out to be the application pool credentials. Apppool id can be local id or an domain id

When its on .NET 2.0 its all launching and working fine with both local & domain accounts.

With .Net 4.0 version with local id, it works fine, but with domain id it errors out as below:

Could_not_load_file_or_assembly file:///"Application path\ XXXX.dll'_or_one_of_its_dependencies._Catastrophic_failure_(Exception_from_HRESULT:0x8000FFFF(E_UNEXPECTED)) 80 - ::1 Mozilla/5.0+(Windows+NT+6.3;+WOW64;+Trident/7.0;+rv:11.0)+like+Gecko http://localhost/ 500 0 0 0

Mitigation steps we have found out till now is

1) Add physical path credentials to the website which should be same as Application pool username/pwd. And this should launch the website
OR
2) At IIS/Website level change the anonymous authentication to application pool identity instead of IUSR. And this launches the website

Can anyone help me understand why this is the case after .NET 4.0 upgradation