Section 115VZB and Section 115VZC of Income Tax Act 1961: Avoidance of Tax and Exclusion from Tonnage Tax Scheme

Sections 115VZB and 115VZC of the Income Tax Act, 1961 contain provisions relating to prevention of misuse of the tonnage tax scheme and exclusion of a tonnage tax company in specified circumstances.

Section 115VZB - Avoidance of Tax

Under Section 115VZB, the tonnage tax scheme shall not apply where a tonnage tax company is a party to any transaction or arrangement which amounts to an abuse of the tonnage tax scheme.

A transaction or arrangement is considered an abuse where entering into or applying such transaction results, or would have resulted but for this section, in obtaining a tax advantage for:

The term "tax advantage" includes determination of allowances, expenses, interest, allocation or apportionment of costs resulting in reduction of income or increase of loss from activities other than tonnage tax activities. It also includes transactions producing profits higher than ordinary profits expected from tonnage tax activities.

Section 115VZB Summary: The provision prevents arrangements designed to obtain unintended tax benefits through misuse of the tonnage tax scheme.

Section 115VZC - Exclusion from Tonnage Tax Scheme

Where a tonnage tax company enters into a transaction or arrangement referred to in Section 115VZB, the Assessing Officer may pass an order in writing excluding such company from the tonnage tax scheme.

Before passing such order, the Assessing Officer must provide an opportunity to the company by issuing a show cause notice and allowing it to explain why it should not be excluded.

No order under this section can be passed without previous approval of the Principal Chief Commissioner or Chief Commissioner.

The provisions do not apply where the company satisfies the Assessing Officer that the transaction or arrangement was a bona fide commercial transaction and was not entered into for obtaining tax advantage under the chapter.

Where exclusion order is passed, the option for tonnage tax scheme ceases from the first day of the previous year in which the transaction or arrangement was entered into.