Section 115VV of ITA, 1961 : Section 115Vv: Limit For Charter In Of Tonnage

Explanation using Example

Imagine a shipping company, Oceanic Liners Pvt. Ltd., has opted for the tonnage tax scheme under the Income-tax Act, 1961, which allows it to be taxed based on the net tonnage of its fleet rather than its actual income. To comply with Section 115VV, the company needs to ensure that no more than 49% of its qualifying ships' net tonnage is made up of chartered-in vessels.

During the financial year, Oceanic Liners operates a total net tonnage of 100,000. The company charters in additional ships amounting to a net tonnage of 45,000. To determine compliance with Section 115VV(1), the company calculates the average net tonnage of chartered-in ships throughout the year.

If the average chartered-in tonnage exceeds 49,000 (49% of 100,000), then under Section 115VV(4), Oceanic Liners would have to calculate its income as though it were not under the tonnage tax scheme for that year, potentially leading to higher taxes.

Furthermore, if Oceanic Liners exceeds the 49% threshold for two consecutive years, as per Section 115VV(5), it would lose the benefit of the tonnage tax scheme from the beginning of the year following the second consecutive year of non-compliance.

In this scenario, if the company charters in ships on bareboat charter-cum-demise terms, these ships are excluded from the "chartered in" calculation as per the Explanation in Section 115VV.