Avoidance of tax and exclusion from tonnage tax scheme

Section 234 — AVOIDANCE OF TAX AND EXCLUSION FROM TONNAGE TAX SCHEME

Section 234 of the Income-tax Act, 2025 corresponds to ss. 115VZB and 115VZC of the Income-tax Act, 1961.

STATUTORY ARCHITECTURE

Section 234 is the anti-abuse provision of the tonnage tax scheme. Where a tonnage tax company is party to a transaction or arrangement amounting to an abuse of the scheme, the scheme does not apply and, after a show-cause notice and with prior approval, the Assessing Officer shall by written order exclude the company, unless the company shows under sub-section (6) that the transaction was a bona fide commercial one not entered into for a tax advantage. Exclusion operates from the first day of the tax year in which the transaction or arrangement was entered into.

KEY ELEMENTS

• Sub-section (1) — subject to the provisions of the Part, the scheme does not apply to a company party to an abusive transaction or arrangement.
• Sub-section (2) — abuse exists if entering into or applying the transaction or arrangement results, or would but for this section have resulted, in a tax advantage for a person other than a tonnage tax company, or for a tonnage tax company in respect of its non-tonnage tax activities.
• Sub-section (3)(a) — "tax advantage" includes the determination of an allowance for expense or interest, or of any cost or expense allocated or apportioned, that reduces income or increases loss from activities other than tonnage tax activities, computed on book entries for the tax year of the transaction.
• Sub-section (3)(b) — it also includes a transaction or arrangement producing more than the ordinary profits which might be expected to arise from tonnage tax activities.
• Sub-sections (4) and (5) — the Assessing Officer shall exclude the company by written order, after a show-cause notice specifying a date and time and with prior approval of the Principal Chief Commissioner or Chief Commissioner.
• Sub-section (6) — the section does not apply if the company satisfies the Assessing Officer that the transaction was a bona fide commercial transaction not entered into to obtain a tax advantage under the Part.
• Sub-section (7) — on exclusion, the option ceases to be in force from the first day of the tax year in which the transaction or arrangement was entered into.

CHANGES FROM THE 1961 ACT

Section 234 combines s. 115VZB and s. 115VZC of the 1961 Act. The Explanation defining "tax advantage" becomes sub-section (3), with the first limb split into two sub-clauses. The two provisos to s. 115VZC(1) of the 1961 Act, on the show-cause notice and prior approval, become sub-section (5). "Previous year" is replaced by "tax year" and "Chapter" by "Part". The 1961 wording "shows to the satisfaction of the Assessing Officer" becomes "satisfies the Assessing Officer". Substance is unchanged.

PRACTITIONER NOTES

• The burden under sub-section (6) is on the company to satisfy the Assessing Officer of the bona fide commercial nature of the transaction and the absence of a tax-advantage purpose.
• Because cessation runs from the first day of the tax year of the transaction, the computation for that year is affected, not only later years.

CROSS-REFERENCES

• This Part — the tonnage tax provisions to which sub-section (1) is subject and under which the tax advantage in sub-section (6) is tested.
• s. 115VZB and s. 115VZC of the 1961 Act — corresponding provisions.