Income Tax 2025

Appearance

Depreciation and gains relating to tonnage tax assets. ​

229(1) ​

For the purposes of computing depreciation under section 230(1)(d), the depreciation for the first tax year of the tonnage tax scheme (herein referred to as the first tax year) shall be computed on the written down value of the qualifying ships as specified under sub-section (2).

229(2) ​

The written down value of the block of assets, being ships or inland vessels as the case may be, as on the first day of the first tax year, shall be divided in the ratio of the book written down value of the qualifying ships (herein referred to as the qualifying assets) and the book written down value of the non-qualifying ships (herein referred to as the other assets), as per the following formula:–– D = A x B B+C E = A x C B+C where,— D = the written down value of the block of qualifying assets as on the first day of the tax year; E = the written down value of the block of other assets as on the first day of the tax year; A = the written down value of the existing block of assets, being ships as on the last day of the immediately preceding tax year; B = the aggregate of book written down value of qualifying assets as on the last day of the preceding tax year; and C = the aggregate of the book written down value of other assets as on the last day of the preceding tax year.

229(3) ​

The block of qualifying assets as determined under sub-section (2) shall constitute a separate block of assets for the purposes of this Part.

229(4) ​

Where an asset forming part of a block of,—

  • (a) qualifying assets begins to be used for purposes other than the tonnage tax business, an appropriate portion of the written down value allocable to such asset shall be reduced from the written down value of that block and shall be added to the block of other assets as per the following formula:— A = B x C D where,–– A = the appropriate portion to be added to the block of the other assets; B = the written down value of block of qualifying assets as on the first day of the tax year; C = the book written down value of qualifying asset which begins to be used for purpose other than the tonnage tax business; and D = the aggregate of book written down value of all the assets forming the block of qualifying assets;
  • (b) other assets, begins to be used for tonnage tax business, an appropriate portion of the written down value allocable to such asset shall be reduced from the written down value of the block of other assets and shall be added to the block of qualifying asset as per the following formula:— E= F x G I where,— E = the appropriate proportion to be added to the block of qualifying asset; F = the written down value of block of other assets as on the first day of the tax year; G = book written down value of the other asset which begins to be used for tonnage tax business; and I = the aggregate of book written down value of all the assets forming the block of other assets.

229(5) ​

For the purposes of computing depreciation under section 230(1)(d) in respect of an asset mentioned in sub-sections (4)(a) and (b), the depreciation computed for the tax year shall be allocated in the ratio of the number of days for which the asset was used for the tonnage tax business and for purposes other than tonnage tax business.

229(6) ​

For the removal of doubts, it is hereby declared that for the purposes of this Act, the depreciation on the block of qualifying assets and block of other assets so created shall be allowed as if such written down value referred to in sub-section (2) had been brought forward from the preceding tax year.

229(7) ​

In this section,—

  • (a) “book written down value” means the written down value as per books of accounts; and
  • (b) “written down value” means the written down value as calculated for purposes of income-tax.

229(8) ​

Any profits or gains arising from the transfer of a capital asset being an asset forming part of the block of qualifying assets shall be chargeable to income-tax as per sections 67 and 74, and the capital gains so arising shall be computed as per sections 67 to 81.

229(9) ​

For the purposes of computing such profits or gains, as referred to in sub-section (8), the provisions of section 74 shall have effect as if for the words “written down value of the block of assets”, the words “written down value of the block of qualifying assets” had been substituted.

229(10) ​

In this section, “written down value of the block of qualifying assets” means the written down value computed as per sub-section (2).

Explanation

Section Summary: ​

This section outlines the rules for calculating depreciation and handling gains related to assets under the tonnage tax scheme. The tonnage tax scheme is a special tax regime for shipping companies, where tax is calculated based on the tonnage of ships rather than actual profits. This section ensures proper allocation of depreciation and treatment of gains when assets are used for tonnage tax business or other purposes.

Key Changes: ​

  1. Separate Block of Assets: Qualifying ships (used for tonnage tax business) and non-qualifying ships (used for other purposes) are treated as separate blocks of assets for depreciation purposes.
  2. Depreciation Allocation: Depreciation is calculated based on the written-down value (WDV) of qualifying and non-qualifying assets, using specific formulas.
  3. Asset Reclassification: If an asset shifts between tonnage tax business and other purposes, its WDV is reallocated between the two blocks using defined formulas.
  4. Capital Gains Treatment: Profits or gains from the transfer of qualifying assets are taxed under capital gains provisions, with specific adjustments to the WDV.

Practical Implications: ​

  1. For Shipping Companies: Companies under the tonnage tax scheme must maintain separate records for qualifying and non-qualifying assets. This ensures accurate depreciation calculations and compliance with tax rules.
  2. Asset Reclassification: If a ship is reclassified (e.g., from tonnage tax business to other purposes), the company must adjust the WDV of the relevant asset blocks and recalculate depreciation.
  3. Capital Gains: When a qualifying ship is sold, the capital gains will be computed based on the adjusted WDV of the block of qualifying assets.

Critical Concepts: ​

  1. Written Down Value (WDV): The value of an asset after accounting for depreciation. It is calculated differently for tax purposes and book purposes.
    • Book WDV: Value as per the company’s books of accounts.
    • Tax WDV: Value as per income tax rules.
  2. Block of Assets: A group of assets of the same type (e.g., ships) treated as a single unit for depreciation purposes.
  3. Qualifying Assets: Ships used for tonnage tax business.
  4. Other Assets: Ships used for purposes other than tonnage tax business.

Compliance Steps: ​

  1. Separate Asset Blocks: Maintain separate blocks for qualifying and non-qualifying ships.
  2. Calculate WDV: Use the formulas provided to calculate the WDV for each block at the start of the tax year.
  3. Reclassify Assets: If an asset’s use changes, reallocate its WDV between the two blocks using the formulas in sub-sections (4)(a) and (b).
  4. Depreciation Allocation: Allocate depreciation for the year based on the number of days an asset was used for tonnage tax business versus other purposes.
  5. Capital Gains Reporting: When a qualifying ship is sold, compute capital gains using the adjusted WDV of the block of qualifying assets.

Examples: ​

  1. Depreciation Calculation:

    • A shipping company has a block of ships with a total WDV of ₹10 crore at the start of the tax year. Qualifying ships have a book WDV of ₹7 crore, and non-qualifying ships have a book WDV of ₹3 crore.
    • Using the formula in sub-section (2):
      • WDV of qualifying assets (D) = ₹10 crore × (₹7 crore / ₹10 crore) = ₹7 crore.
      • WDV of non-qualifying assets (E) = ₹10 crore × (₹3 crore / ₹10 crore) = ₹3 crore.
    • Depreciation will be calculated separately for these two blocks.

  2. Asset Reclassification:

    • A ship with a book WDV of ₹2 crore, initially part of the qualifying assets, is now used for non-tonnage tax business.
    • Using the formula in sub-section (4)(a):
      • A = ₹7 crore (WDV of qualifying assets) × ₹2 crore (book WDV of the reclassified ship) / ₹7 crore (total book WDV of qualifying assets) = ₹2 crore.
    • ₹2 crore is deducted from the qualifying assets block and added to the non-qualifying assets block.

  3. Capital Gains:

    • A qualifying ship is sold for ₹5 crore. Its WDV in the qualifying assets block is ₹3 crore.
    • Capital gains = Sale price (₹5 crore) – WDV (₹3 crore) = ₹2 crore.
    • This ₹2 crore will be taxed as capital gains under sections 67 and 74.

This section ensures clarity and consistency in handling depreciation and gains for shipping companies under the tonnage tax scheme, while maintaining compliance with income tax rules.