Section 115VK and Section 115VL of Income Tax Act 1961: Depreciation, Deductions and Set Off
Sections 115VK and 115VL formed part of Chapter XII-G of the Income-tax Act, 1961, dealing with the tonnage tax scheme for shipping companies. Section 115VK prescribed the special depreciation and written down value mechanism for qualifying assets, while Section 115VL restricted deductions, losses and set-off when tonnage income was computed under the scheme.
- Section 115VK: deals with depreciation and allocation of written down value between qualifying and other assets under the tonnage tax scheme.
- Section 115VL: deems specified deductions and allowances to have been fully given effect, restricts specified loss carry-forward or set-off, denies Chapter VI-A deductions against qualifying shipping profits and applies notional depreciation for written down value purposes.
- Finance Act, 2025: expanded the Section 115VK(2) wording to include inland vessels with effect from 1 April 2026.
- Current corresponding law: see Sections 229 and 230 of the Income-tax Act, 2025.
Section 115VK - Depreciation under the Tonnage Tax Scheme
Section 115VK provided the mechanism for maintaining depreciation and written down value records when a company entered or operated under the tonnage tax scheme. Although tonnage income is computed on a presumptive basis, depreciation remains relevant for tracking the written down value of qualifying and non-qualifying assets and for other consequences under the Act.
Meaning of key terms
Written down value: broadly, the tax value of a depreciable asset or block after giving effect to depreciation and prescribed adjustments. Section 115VK used a special allocation mechanism for the relevant block of assets.
Book written down value: Section 115VK expressly defined this expression as the written down value appearing in the books of account.
Qualifying assets: for the Section 115VK allocation, qualifying ships formed the qualifying-asset block. The Finance Act, 2025 amended subsection (2) to extend the relevant wording to inland vessels from 1 April 2026.
How Section 115VK operated
Subsection (1): depreciation for the first previous year of the tonnage tax scheme was computed on the written down value of qualifying ships determined under subsection (2).
Subsection (2): the written down value of the relevant block was divided by reference to the book written down values of qualifying assets and non-qualifying assets. With effect from 1 April 2026, the Finance Act, 2025 inserted a reference to inland vessels in this subsection.
Subsection (3): the block of qualifying assets determined under subsection (2) constituted a separate block for the purposes of the tonnage tax chapter.
Subsection (4): prescribed how the book written down values of qualifying assets and other assets were identified and aggregated for determining the allocation ratio. Revaluation changes after the specified 2004 Finance Act assent date were ignored for this purpose.
Subsections (5) and (6): required proportionate movement of written down value where an asset changed use between tonnage tax business and other business.
Subsection (7): where an asset changed use during the year, depreciation was allocated according to the number of days for which it was used for tonnage tax business and for other purposes.
Explanations: the qualifying and other blocks were treated as if their allocated written down values had been brought forward from the preceding previous year, and "book written down value" meant the value appearing in the books of account.
Section 115VL - General Exclusion of Deduction and Set Off
Section 115VL was a non-obstante provision. It applied notwithstanding other provisions of the Income-tax Act, 1961 and ensured that normal deductions, allowances, losses and depreciation could not be used to distort the special computation of tonnage income.
| Clause | Rule under Section 115VL | Effect |
|---|---|---|
| (i) | Sections 30 to 43B applied as if the relevant loss, allowance or deduction had been fully given effect for the relevant previous year. | Normal business deductions were treated as absorbed for the tonnage tax computation framework. |
| (ii) | Specified losses under Sections 70, 71, 72 and 72A attributable to operating qualifying ships could not be carried forward or set off where they related to years under the tonnage tax scheme. | Specified tonnage-business losses could not be preserved for later set-off. |
| (iii) | No Chapter VI-A deduction was allowed in relation to profits and gains from operating qualifying ships. | Chapter VI-A deductions could not reduce the qualifying shipping profits covered by the scheme. |
| (iv) | For depreciation under Section 32, written down value was computed as if depreciation had been claimed and actually allowed for the relevant previous years. | Written down value continued to reduce notionally even though tonnage income followed the special scheme. |
Current Position under the Income-tax Act 2025
For tax years governed by the Income-tax Act, 2025, the former Section 115VK subject matter is found principally in Section 229, which deals with depreciation and gains relating to tonnage tax assets. The former Section 115VL exclusion rules, together with the former Section 115VM loss provisions, are consolidated in Section 230, titled "Exclusion of deduction, loss, set off, etc."
Section 230 continues the core approach: normal specified deductions are treated as given effect, specified losses relating to qualifying shipping business are restricted, Chapter VIII deductions are excluded in relation to qualifying shipping profits, and depreciation is taken into account notionally for written down value purposes.
Practical Effect for a Tonnage Tax Company
The tonnage tax scheme is a special computation regime. The company does not simply calculate qualifying shipping income by deducting ordinary expenses from actual shipping receipts. Instead, tonnage income is determined under the special statutory mechanism, while the depreciation and loss rules preserve the integrity of asset values and prevent the same allowances or losses from being used again outside the scheme contrary to the statutory framework.
For historical assessments or litigation under the Income-tax Act, 1961, the applicable version of Sections 115VK and 115VL should be checked for the relevant assessment year. For tax years governed by the Income-tax Act, 2025, Sections 229 and 230 should be read with the other tonnage tax provisions of that Act and the applicable rules and forms.
Official Sources and Further Reading
This article is a statutory reference and explanatory guide. For a filing, assessment, appeal or transaction, verify the law applicable to the relevant tax year and facts.