Section 115VM: Exclusion of Loss under the Tonnage Tax Scheme
Section 115VM of the Income-tax Act, 1961 addresses the treatment of business losses incurred before a shipping company opts for the tonnage tax scheme. It restricts their set-off and provides for reasonable apportionment where required.
What is the exclusion of loss under Section 115VM?
A company may have accumulated losses from its shipping business before choosing tonnage taxation. Under the tonnage tax scheme, taxable income from qualifying shipping operations is calculated using statutory tonnage-based rules rather than ordinary accounting profits. Section 115VM prevents pre-option losses attributable to that business from being used freely against income from other activities after the option is exercised.
The provision works with Section 115VL, which restricts deductions and the use of losses during tonnage-tax years, and Section 115VP, which concerns opting into the scheme.
Section 115VM(1): Treatment of losses arising before the option
Under subsection (1), Section 72, which deals with carry-forward and set-off of business losses, applies to losses accrued before the company's tonnage-tax option that are attributable to its tonnage-tax business as if those losses had been set off against relevant shipping income in previous years during which the company is under the scheme.
This is a statutory deeming rule. It does not mean that the company is entitled to reduce the tonnage income actually computed under the scheme by those historical losses. Its practical effect is to prevent such losses from being preserved or redeployed as though the tonnage-tax regime had not intervened.
Section 115VM(2): No set-off against other income
Subsection (2) provides that the pre-option losses described in subsection (1) cannot be set off against income other than relevant shipping income in any previous year beginning on or after the company exercises its option under Section 115VP.
Consequently, losses attributable to the qualifying shipping business cannot be diverted to offset profits from a separate trading, logistics, manufacturing or other non-tonnage business merely because the same company carries on both activities.
Section 115VM(3): Reasonable apportionment of losses
Where records contain mixed losses from tonnage-tax and non-tonnage activities, subsection (3) requires any necessary apportionment to be made on a reasonable basis. This calls for a defensible allocation supported by the company's accounts, operational records and the nature of the costs or losses concerned.
The section does not prescribe a universal allocation percentage. The appropriate method depends on the facts, such as directly traceable expenses, vessel operations, business segments and other reliable records. For common costs, see also Section 115VJ.
Illustrative example of pre-option shipping losses
Assume a company has carried-forward business losses of Rs. 30 lakh before entering the tonnage tax scheme. Its records reasonably attribute Rs. 20 lakh to qualifying shipping operations and Rs. 10 lakh to a separate non-shipping business.
| Loss category | Amount | Indicative treatment |
|---|---|---|
| Pre-option loss attributable to tonnage-tax business | Rs. 20 lakh | Subject to the deeming rule in Section 115VM(1); not available for set-off against other income under subsection (2). |
| Loss attributable to independent non-tonnage business | Rs. 10 lakh | Considered under ordinary loss provisions, subject to the facts and applicable conditions. |
This example illustrates classification, not a fresh deduction against statutory tonnage income. The availability and carry-forward period of any non-tonnage loss must be checked separately under the applicable law.
Interaction with other tonnage-tax provisions
- Section 115VI defines relevant shipping income, which is central to the restriction in Section 115VM.
- Section 115VG sets out the statutory computation of tonnage income.
- Section 115VL generally excludes specified deductions, set-offs and related benefits during tonnage-tax years.
- Section 115VP concerns the method and timing of electing tonnage taxation.
Practical compliance checklist
- Identify the date from which the tonnage tax option took effect and the assessment years involved.
- Reconcile carried-forward business losses arising before the option with tax returns and assessment records.
- Separate losses attributable to qualifying shipping operations from those of other businesses.
- Document the basis of any apportionment and retain supporting books and operational records.
- Apply the restrictions on set-off before determining any balance eligible for ordinary treatment.
- For tax years beginning on or after 1 April 2026, check the 2025 Act and transitional provisions.
Frequently asked questions
Can a shipping company use pre-option tonnage business losses against unrelated profits?
No. Section 115VM(2) restricts losses covered by subsection (1) from being set off against income other than relevant shipping income in the specified years.
Does Section 115VM apply to all losses of a company?
No. It concerns pre-option losses attributable to the tonnage-tax business. Losses from distinct non-tonnage businesses require separate examination under the ordinary provisions.
How are mixed business losses divided?
Section 115VM(3) calls for reasonable apportionment where necessary. The company should retain a documented, fact-based allocation.
Official legal resources
For authoritative text and amendments, consult the Income Tax Department's Income-tax Act resources, the Income Tax Department and India Code. Search the applicable version of the legislation for the relevant tax year, including the Income-tax Act, 2025 and related rules.
This article provides general statutory information. Actual loss treatment depends on the year, the option exercised, the company's records and the applicable law.