Section 115VT — Transfer of Profits to Tonnage Tax Reserve Account

CHAPTER XII-G — SPECIAL PROVISIONS RELATING TO INCOME OF SHIPPING COMPANIES (TONNAGE TAX)

Section 115VT — Transfer of profits to Tonnage Tax Reserve Account

Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise

Chapter / Part: Chapter XII-G (Special Provisions Relating to Income of Shipping Companies — the Tonnage Tax Scheme), inserted by the Finance (No. 2) Act, 2004 w.e.f. 1-4-2005 (AY 2005-06).

Finance Act, 2026: No amendment. The Finance Act, 2026 does not touch any section of Chapter XII-G (verified against the Finance Act, 2026 text).

Finance Act, 2025: Extended the Scheme to inland vessels (Inland Vessels Act, 2021) — inland-vessel words inserted across the Chapter w.e.f. 1-4-2026; s.115VP timeline/IFSC provisos also added. Text below is the in-force position for AY 2026-27.

A. SECTION COMMENTARY

1. The reinvestment condition

Section 115VT is the principal CONDITION of continued eligibility. A tonnage tax company must credit, each year, at least 20 per cent of the book profit from its s.115V-I(1)(i)&(ii) activities to a 'Tonnage Tax Reserve Account' (TTRA) [sub-s.(1)], to be utilised within EIGHT years for acquiring a new ship (or, from 1-4-2026, a new inland vessel) and, pending acquisition, for the business of operating qualifying ships — but NOT for dividends, remittance outside India, or creating assets abroad [sub-s.(3)]. 'Book profit' takes the s.115JB Explanation meaning to the extent of the shipping activities; 'new ship' includes a second-hand ship not previously owned by a person resident in India.

2. Consequences of shortfall and misuse

The section is finely calibrated. A shortfall in a year can be carried to the next year (with a two-consecutive-year limit on the relief) [sub-s.(2)]. If reserve amounts are misused, not used within eight years, or the acquired ship is sold within three years, a proportionate amount of the relevant shipping income of the creation-year is taxed under the ordinary provisions [sub-s.(4)], with credit for the proportionate tonnage income already taxed (proviso). Where less than the minimum is credited, a proportionate slice of relevant shipping income is taxed normally [sub-s.(5)]. And — most drastically — if the reserve is not created for any TWO CONSECUTIVE years, the option CEASES from the beginning of the year following the second [sub-s.(6)], feeding s.115VQ(2)(b) and the s.115VS bar.

3. Practical significance

Section 115VT is where most compliance risk in the Scheme resides: it converts the tax saving into a fleet-renewal obligation. The formulae for proportionate taxation of misused/short reserves (set out by CBDT in its explanatory material) require careful working each year. The provision should be read with s.115VW (audit) and s.115VU/115VV (the other continuing conditions whose breach triggers cessation under s.115VQ(2)(b)).

B. STATUTORY POSITION (verbatim operative text)

Section 115VT, Income-tax Act, 1961 (Chapter XII-G), as in force on and after 1 April 2026 (key operative limbs reproduced):

115VT. (1) A tonnage tax company shall, subject to and in accordance with the provisions of this section, be required to credit to a reserve account (hereafter in this section referred to as the Tonnage Tax Reserve Account) an amount not less than twenty per cent of the book profit derived from the activities referred to in clauses (i) and (ii) of sub-section (1) of section 115V-I in each previous year to be utilised in the manner laid down in sub-section (3): Provided that a tonnage tax company may transfer a sum in excess of twenty per cent of the book profit and such excess sum transferred shall also be utilised in the manner laid down in sub-section (3). Explanation.—For the purposes of this section, “book profit” shall have the same meaning as in the Explanation to sub-section (2) of section 115JB so far as it relates to the income derived from the activities referred to in clauses (i) and (ii) of sub-section (1) of section 115V-I.

(2) Where the company has book profit from the business of operating qualifying ships and book loss from any other sources, and consequently, the company is not in a position to create the full or any part of the reserves under sub-section (1), the company shall create the reserves to the extent possible in that previous year and the shortfall, if any, shall be added to the amount of the reserves required to be created for the following previous year ...: Provided that ... the company shall be considered as having created sufficient reserves for the first mentioned previous year: Provided further that nothing contained in the first proviso shall apply in respect of the second year in case the shortfall in creation of reserves continues for two consecutive previous years.

(3) The amount credited to the Tonnage Tax Reserve Account under sub-section (1) shall be utilised by the company before the expiry of a period of eight years next following the previous year in which the amount was credited— (a) for acquiring a new ship or new inland vessel, as the case may be, for the purposes of the business of the company; and (b) until the acquisition of a new ship or new inland vessel, as the case may be, for the purposes of the business of operating qualifying ships other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India.

(4) Where any amount credited to the Tonnage Tax Reserve Account under sub-section (1),— (a) has been utilised for any purpose other than that referred to in clause (a) or clause (b) of sub-section (3); or (b) has not been utilised for the purpose specified in clause (a) of sub-section (3); or (c) has been utilised for the purpose of acquiring a new ship or new inland vessel, as the case may be, as specified in clause (a) of sub-section (3), but such ship or inland vessel, as the case may be, is sold or otherwise transferred, other than in any scheme of demerger ... before the expiry of three years from the end of the previous year in which it was acquired, an amount [proportionate to the misused/unutilised reserve] shall be taxable under the other provisions of this Act— (i) ... in the year in which the amount was so utilised; or (ii) ... in the year immediately following the period of eight years ...; or (iii) ... in the year in which the sale or transfer took place: Provided that the income so taxable ... shall be reduced by the proportionate tonnage income charged to tax in the year of creation of such reserves.

(5) Notwithstanding anything contained in any other provision of this Chapter, where the amount credited to the Tonnage Tax Reserve Account ... is less than the minimum amount required to be credited under sub-section (1), an amount [proportionate to the shortfall] shall not be taxable under the tonnage tax scheme and shall be taxable under the other provisions of this Act.

(6) If the reserve required to be created under sub-section (1) is not created for any two consecutive previous years, the option of the company for tonnage tax scheme shall cease to have effect from the beginning of the previous year following the second consecutive previous year in which the failure to create the reserve under sub-section (1) had occurred. Explanation.—For the purposes of this section, “new ship or new inland vessel”, as the case may be, includes a qualifying ship which, before the date of acquisition by the qualifying company was used by any other person, if it was not at any time previous to the date of such acquisition owned by any person resident in India.

Inland-vessel words in sub-ss.(3), (4)(c) and the Explanation inserted/substituted by the Finance Act, 2025 w.e.f. 1-4-2026. Sub-sections (4) and (5) abridged for length (full text in the Act). Unamended by the Finance Act, 2026.

C. AUTHORITIES

Candour note: No reported decision construes the s.115VT reserve machinery directly. It is the central continuing condition; the authorities below frame the Scheme and CBDT's exposition of the reserve mechanism, which the courts treat as binding.

C-1 CBDT's exposition of the reserve condition (binding)

CBDT Circular No. 5/2005 dated 15 July 2005 — Explanatory Notes to the Finance (No. 2) Act, 2004

Nature: Departmental circular explaining the newly inserted Tonnage Tax Scheme.

Effect: Describes the Scheme as a 'preferential regime of taxation' and clarifies that the charging provision is s.115VA read with s.115VF and s.115VG. Relied on by the Supreme Court in Trans Asian Shipping (supra), which reaffirmed that CBDT circulars explaining a scheme bind the Department.

On the binding force of CBDT circulars — Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC); Navnit Lal C. Javeri v. K.K. Sen, AAC (1965) 56 ITR 198 (SC); UCO Bank v. CIT (1999) 237 ITR 889 (SC)

Relevance: Expressly invoked by the Supreme Court in Trans Asian Shipping to hold that CBDT circulars explaining the Tonnage Tax Scheme (notably Circular No. 5/2005) bind the Revenue. Useful wherever a beneficial reading of a Chapter XII-G provision is supported by CBDT's contemporaneous exposition.

C-2 Purposive framing of the Scheme (Supreme Court)

CIT v. Trans Asian Shipping Services (P) Ltd — (2016) 385 ITR 637 (SC) / [2016] 71 taxmann.com 35 / (2016) 241 Taxman 30 (SC)

Forum / Bench: Supreme Court of India; T.S. Thakur CJI, A.K. Sikri J and R. Banumathi J. Judgment dated 5 July 2016, affirming the Kerala High Court and the Cochin Bench of the Tribunal.

Provisions: Sections 115VA, 115VB, 115VF, 115VG (including the s.115VG(4) Explanation on 'deemed tonnage') and 115VX, read with Rule 11Q; Chapter XII-G generally.

Issue: Whether income from 'slot charter' operations of a tonnage tax company can be included in 'tonnage income' under the Tonnage Tax Scheme (TTS) even where those operations are carried on in ships that are NOT the company's own 'qualifying ships' — and whether production of the tonnage certificate referred to in s.115VX is a pre-condition for computing such slot-charter income.

Held: Allowing the assessee, the Court held that although only income from operating a 'qualifying ship' is computed under Chapter XII-G, s.115VB expressly treats a company as 'operating a ship' even where only a PART of a ship has been chartered in under an arrangement such as slot charter, space charter or joint charter. A slot-charter arrangement is made with a shipping line and not in relation to an identified ship, so the carrying vessel (and its certificate) cannot be identified. The 'deemed tonnage' mechanism in the Explanation to s.115VG(4) — covering purchase of slots, slot charter and sharing of break-bulk vessel — was introduced precisely to capture such arrangements; to insist on a s.115VX certificate for slot charters would render deemed tonnage otiose. The s.115VX certificate requirement therefore does NOT apply to slot/space-charter operations and the slot-charter income is includible in tonnage income.

Ratio / why it matters: The leading — and only — Supreme Court authority on Chapter XII-G. It settles the architecture of the Scheme: (i) the charging provision is s.115VA read with s.115VF and s.115VG; (ii) the TTS is a 'preferential regime of taxation' to be construed to advance its object of making Indian shipping globally competitive (Rakesh Mohan Committee, January 2002); and (iii) 'deemed tonnage' is a distinct head of tonnage not dependent on a ship-specific certificate. The Court relied on CBDT Circular No. 5/2005 dated 15-7-2005 and reaffirmed that CBDT circulars explaining a scheme bind the Department.

Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text reproduced verbatim from the Income-tax Act, 1961 (text as in force on and after 1 April 2026, incorporating the inland-vessel insertions made by the Finance Act, 2025 with effect from 1 April 2026). Citations are stated as reported; tribunal and stay-stage orders are flagged as such. Where a section has not been judicially construed, that is stated candidly and the nearest governing authority is given. This material is for professional reference and is not legal advice.