Avoidance of tax and exclusion from tonnage tax scheme
[Section-234 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 234(1) of Income Tax Act 2025
234(1) Subject to the provisions of this Part, 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.
Section 234(2) of Income Tax Act 2025
234(2) For the purposes of sub-section (1), a transaction or arrangement shall be considered an abuse, if the entering into or the application of such transaction or arrangement results, or would but for this section have resulted, in a tax advantage being obtained for—
- (a) a person other than a tonnage tax company; or
- (b) a tonnage tax company in respect of its non-tonnage tax activities.
Section 234(3) of Income Tax Act 2025
234(3) In this section, “tax advantage” includes—
- 234(3)(a) the determination of—
- (i) the allowance for any expense or interest; or
- (ii) any cost or expense allocated or apportioned,
- which has the effect of reducing the income or increasing the loss, from activities other than tonnage tax activities chargeable to tax, computed on the basis of entries made in the books of account in respect of the tax year in which the transaction was entered into; or
- 234(3)(b) a transaction or arrangement which produces to the tonnage tax company more than ordinary profits which might be expected to arise from tonnage tax activities.
Section 234(4) of Income Tax Act 2025
234(4) Where a tonnage tax company is a party to any transaction or arrangement referred to in sub-section (1), the Assessing Officer shall, by an order in writing, exclude such company from the tonnage tax scheme.
Section 234(5) of Income Tax Act 2025
234(5) The Assessing Officer shall pass an order under sub-section (4), after––
- (a) giving an opportunity to the company by serving a notice calling upon such company to show cause, on a date and time to be specified in the notice, why it should not be excluded from the tonnage tax scheme; and
- (b) obtaining prior approval of the Principal Chief Commissioner or Chief Commissioner.
Section 234(6) of Income Tax Act 2025
234(6) The provisions of this section shall not apply where the company satisfies the Assessing Officer that the transaction or arrangement was a bona fide commercial transaction and had not been entered into for the purpose of obtaining tax advantage under this Part.
Section 234(7) of Income Tax Act 2025
234(7) Where an order has been passed under sub-section (4) by the Assessing Officer excluding the tonnage tax company from the tonnage tax scheme, the option for tonnage tax scheme shall cease to be in force from the first day of the tax year in which the transaction or arrangement was entered into.
FAQs on Section 234 of Income Tax Act 2025
What is the objective of Section 234 of the Income Tax Act, 2025?
The objective is to prevent abuse of the tonnage tax scheme by excluding companies that misuse the scheme to gain undue tax advantages.
When does the tonnage tax scheme not apply under Section 234(1)?
The scheme does not apply if a tonnage tax company is party to a transaction or arrangement that amounts to an abuse of the scheme.
What constitutes an abuse of the tonnage tax scheme under Section 234(2)?
A transaction or arrangement is abusive if it results in a tax advantage for someone other than the tonnage tax company or for the company in respect of its non-tonnage tax activities.
What is meant by ‘tax advantage’ under Section 234(3)?
‘Tax advantage’ includes reduced income or increased loss in non-tonnage tax activities through allowances or cost allocations, or gaining more than ordinary profits from tonnage tax activities.
How does a transaction reduce income or increase loss under Section 234(3)(a)?
By allowing expenses, interest, or cost allocations that affect the taxable income from non-tonnage tax activities in a way that reduces tax liability.
What is covered under Section 234(3)(b) regarding excessive profits?
It refers to transactions that yield more than ordinary profits from tonnage tax activities, indicating potential abuse of the scheme.
Who has the authority to exclude a company from the tonnage tax scheme?
The Assessing Officer is authorized to exclude a tonnage tax company from the scheme under Section 234(4).
What procedural steps must the Assessing Officer follow before excluding a company under Section 234(5)?
The company must be given an opportunity to show cause and the Assessing Officer must obtain prior approval from the Principal Chief Commissioner or Chief Commissioner.
Can a company defend itself against exclusion from the scheme?
Yes, under Section 234(6), a company can avoid exclusion if it proves the transaction was a bona fide commercial one and not aimed at obtaining a tax advantage.
From when is the tonnage tax option discontinued once a company is excluded?
Under Section 234(7), the option ceases from the first day of the tax year in which the abusive transaction or arrangement was entered into.
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