Section 115VZC: Exclusion from Tonnage Tax Scheme
Section 115VZC of the Income-tax Act, 1961 prescribes the procedure and consequences for excluding a tonnage tax company from the tonnage tax scheme when it participates in an abusive tax arrangement described in Section 115VZB. It provides for a written order, an opportunity to show cause, prior senior-level approval and an exception for bona fide commercial transactions.
What is exclusion under Section 115VZC?
The tonnage tax scheme provides a special statutory basis for computing income from qualifying shipping operations. Section 115VZB addresses abuse of that scheme, while Section 115VZC establishes how an Assessing Officer may exclude a company following such an arrangement. Exclusion is not the same as an ordinary adjustment to a particular expense: it affects the company's option to be taxed under the scheme from the date specified by law.
Section 115VZC(1): Written exclusion order and safeguards
Where a tonnage tax company is a party to a transaction or arrangement referred to in Section 115VZB(1), the Assessing Officer shall, subject to the statutory safeguards, exclude that company from the tonnage tax scheme by an order in writing.
First proviso: Show-cause notice and opportunity to respond
Before exclusion, the Assessing Officer must serve a notice calling on the company to explain why it should not be excluded. The notice must specify the date and time for showing cause. The company should respond with the transaction documents, commercial rationale, accounting records and other evidence relevant to the allegation.
Second proviso: Previous approval
No exclusion order under subsection (1) may be passed without the previous approval of the Principal Chief Commissioner or Chief Commissioner, as stated in the supplied statutory text. The approval is an additional statutory safeguard; it does not replace the requirement to provide a show-cause opportunity.
Section 115VZC(2): Bona fide commercial transaction exception
The exclusion provision does not apply if the company establishes, to the satisfaction of the Assessing Officer, that the transaction or arrangement was bona fide commercial and was not entered into for the purpose of obtaining a tax advantage under the Chapter. Both aspects matter. A commercial label alone is not conclusive; contemporaneous records supporting the genuine business purpose may be important.
Section 115VZC(3): When does exclusion take effect?
Once an exclusion order is passed under subsection (1), the tonnage tax option ceases to be in force from the first day of the previous year in which the relevant transaction or arrangement was entered into. The consequence is tied to the previous year of the arrangement, not merely to the date of the Assessing Officer's order.
Illustration: Suppose an arrangement covered by Section 115VZB was entered into during a previous year governed by the 1961 Act. If the Assessing Officer lawfully excludes the company after notice and prior approval, the tonnage tax option ceases from the first day of that previous year. Whether the arrangement qualifies for the bona fide exception must be examined on its actual facts.
How Section 115VZB defines the underlying abuse
Section 115VZB addresses arrangements producing a tax advantage for a person other than the tonnage tax company or for a tonnage tax company's non-tonnage-tax activities. Its Explanation includes certain expense or interest allocations that reduce non-tonnage taxable income or increase losses, as well as arrangements yielding more than ordinary profits from tonnage tax activities. These concepts provide the substantive context for the exclusion procedure under Section 115VZC.
Key statutory requirements at a glance
| Provision | Requirement or effect |
|---|---|
| 115VZC(1) | Written exclusion order where a transaction or arrangement falls under Section 115VZB(1) |
| First proviso | Show-cause notice specifying the date and time to respond |
| Second proviso | Previous approval of the Principal Chief Commissioner or Chief Commissioner |
| 115VZC(2) | Exception for a bona fide commercial arrangement not entered into to obtain a tax advantage |
| 115VZC(3) | Option ceases from the first day of the previous year of the arrangement |
Practical response and compliance considerations
- Preserve the show-cause notice, underlying transaction agreements and correspondence.
- Identify the alleged tax advantage and the specific activities to which it relates.
- Maintain evidence of the transaction's commercial rationale and arm's-length support where relevant.
- Reconcile allocations of shared costs, interest, revenue and other amounts between tonnage and non-tonnage activities.
- Respond within the specified process and retain proof of submission.
- Check whether the written order records the required statutory approval and addresses the company's explanation.
- Assess the year from which the tonnage tax option would cease and the resulting tax computations.
- For tax years after the 2025 Act's commencement, verify the applicable successor provisions and procedural rules.
Legislative amendment noted in the original text
The source page records that Act 25 of 2014, section 4, substituted the reference to the Principal Chief Commissioner or Chief Commissioner for the earlier reference to the Chief Commissioner, with effect from 1 June 2013. This historical amendment note is retained for understanding the text.
Related provisions
Read Section 115VZB (avoidance of tax) alongside this section. Other relevant provisions include Section 115VW (accounts and audit), Section 115VX (determination of tonnage) and Section 115VZA (temporary cessation).
Frequently asked questions
Can the Assessing Officer exclude a company without a show-cause notice?
No. The first proviso to Section 115VZC(1) requires a notice giving the company an opportunity to show cause on a specified date and time.
Is prior approval required before an exclusion order?
Yes. The second proviso requires previous approval of the Principal Chief Commissioner or Chief Commissioner.
Does every transaction with a tax benefit lead to exclusion?
No. The arrangement must fall within Section 115VZB(1), and Section 115VZC(2) provides an exception where the company establishes a bona fide commercial transaction not entered into to obtain a tax advantage under the Chapter.
From what date does an exclusion order operate?
Under Section 115VZC(3), the option ceases from the first day of the previous year in which the relevant arrangement was entered into.
Official legal sources
For authoritative legislation and amendments, consult India Code, the Income Tax Department's Acts resource and the Income Tax e-Filing portal. Verify the operative law and applicable procedures for the relevant tax year.
This article is general information and does not replace statutory verification or advice tailored to a particular transaction.