What is Demerger and What is the Effect of Temporarily Ceasing to Operate Qualifying Ships under Sections 115VZ and 115VZA of Income Tax Act 1961?

Sections 115VZ and 115VZA of the Income Tax Act, 1961 form part of the provisions relating to the tonnage tax scheme applicable to qualifying shipping companies.

Section 115VZ of Income Tax Act 1961: Demerger

Section 115VZ provides for the effect of demerger on a company covered under the tonnage tax scheme.

Where, under a scheme of demerger, the demerged company transfers its business to the resulting company before expiry of the option period under the tonnage tax scheme, the scheme shall, subject to the provisions of Chapter XII-G, apply to the resulting company for the remaining unexpired period if the resulting company is a qualifying company.

The option for the tonnage tax scheme of the demerged company continues for the remaining period if the demerged company continues to satisfy the conditions of a qualifying company.

Section 115VZA of Income Tax Act 1961: Effect of Temporarily Ceasing to Operate Qualifying Ships

Temporary cessation of operation is distinguished from permanent cessation.

Under section 115VZA(1), temporary cessation of operation of a qualifying ship by a company shall not be treated as cessation of operation for the purposes of the tonnage tax provisions. The company is deemed to continue operating the qualifying ship.

Under section 115VZA(2), where a qualifying company continues to operate a ship which temporarily ceases to qualify as a qualifying ship, that ship shall not be treated as a qualifying ship for the purposes of Chapter XII-G during such period.

Summary