Section 228 Relevant shipping income and exclusion from book profit.

Income-tax Act, 2025

At a Glance

The document is Clause 228 of the Income-tax Bill, 2025 - (Old Version) which sets out the concept of "relevant shipping income" for a tonnage tax company and provides for exclusion of such income from the company's book profit for specified tax computations. It matters to shipping companies electing or eligible for tonnage taxation, tax authorities (Assessing Officers), and advisors in maritime and corporate taxation. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hooks: Clause 228 forms part of a Part dealing with special provisions relating to income of shipping companies within the Income Tax Bill, 2025. It defines "relevant shipping income" for a "tonnage tax company", lists core and incidental activities, prescribes limits for incidental income, empowers the Central Government to exclude or limit certain activities by notification, and directs treatment of transfers between tonnage and non-tonnage businesses, allocation of common costs and depreciation, and the exclusion of the relevant shipping book profit or loss from book profit for purposes of section 206. Definitions provided in the Clause include "pooling arrangement" and "contract of affreightment" (see sub-section (4)). Other definitional details and broader contextual definitions (e.g., "tonnage tax company", "qualifying ship", "turnover") are Not stated in the document.

Statutory Provision Mode

Text & Scope

• The clause defines "relevant shipping income" (sub-section (1)) as the aggregate of:
  • profits from core activities (sub-section (3)); and
  • profits from incidental activities (sub-section (7)).
• Sub-section (2) places a threshold limitation: incidental incomes in aggregate exceeding 0.25% of turnover from core activities shall be excluded from relevant shipping income and taxed under other provisions of the Act.
  • Core activities (sub-section (3)) comprise:
  • activities from operating qualifying ships; and
• specified ship-related or inland-vessel-related activities including:
  • (i) shipping contracts - earnings from pooling arrangements and contracts of affreightment; and
  • (ii) specified shipping trades - passenger ship on-board/on-shore activities (fares; food and beverages consumed on-board) and container shipping operations such as slot/space/joint charters, feeder services and container box leasing.
• Sub-section (4) defines "pooling arrangement" and "contract of affreightment". Sub-section (5) empowers the Central Government to exclude any activity referred to in sub-section 3(b) or prescribe limits to their inclusion in core activities by notification, with parliamentary laying and modification procedure specified in sub-section (6).
• Sub-section (7) provides that incidental activities are those incidental to the core activities and "as prescribed for the purpose." Sub-section (8) disapplies this Part to income from non-qualifying ships - such income to be computed under other provisions of the Act.
• Sub-sections (9)-(12) deal with related-party or non-arm's-length transfers between tonnage tax business and other businesses, market value adjustment, Assessing Officer's power to adopt reasonable basis where computation under (9) is exceptionally difficult, and ability to make adjustments where arrangements produce more than ordinary profits because of close connection or other reasons.
• Sub-section (13) states that any loss in relevant shipping income shall be ignored for the purposes of computing tonnage income under this Part. Sub-sections (14) and (15) require reasonable allocation of common costs and allocation of depreciation for non-exclusive assets respectively. Sub-section (16) provides that the book profit or loss from the relevant shipping activities shall be excluded from the company's book profit for the purposes of section 206.

Interpretation

The clause adopts a purposive construction typical of sector-specific tax regimes: identify the operational income that is to be governed by tonnage-tax treatment (core and incidental); ring-fence (via the 0.25% threshold) peripheral income to prevent excessive unrelated trading from benefiting; and enable administrative adjustments to counter non-arm's-length transfers or artificial arrangements. The express inclusion of specific shipping trades and the definitional treatment of pooling and affreightment indicate legislative intent to capture customary shipping revenue streams within the tonnage regime. Where precise valuation is impracticable, the Assessing Officer is given discretionary power to adopt a reasonable basis - an administrative safeguard. The provision to exclude book profit/loss from section 206 computations indicates an aim to avoid double-counting or misaligned computation where tonnage rules produce separate tax outcomes.

Exceptions/Provisos

Carve-outs and conditions explicitly stated:

• Incidental income exceeding 0.25% of turnover from core activities is excluded from relevant shipping income (sub-section (2)).
• Income from non-qualifying ships is excluded from this Part and computed under other provisions (sub-section (8)).
• Losses in relevant shipping income are ignored for tonnage income computation (sub-section (13)).
• Central Government may exclude or prescribe limits by notification (sub-section (5)); such notifications are subject to parliamentary laying and possible modification/annulment under sub-section (6).

Illustrations

• Example 1: A tonnage tax company earns freight from qualifying ships and incidental revenue from sale of on-board merchandise equal to 0.1% of core turnover. Under the Clause, such incidental revenue remains part of relevant shipping income (since <= 0.25%).
• Example 2: If incidental revenues aggregate to 0.5% of core turnover, the excess 0.25% is excluded from relevant shipping income and taxed under general provisions (per sub-section (2)).
• Example 3: A company transfers fuel stored for tonnage business to a non-tonnage business at book value materially below market. Under sub-section (9)-(11), the Assessing Officer will compute relevant shipping income as if the transfer occurred at market value, or adopt a reasonable basis if exceptional difficulties arise.

Interplay

Explicit interaction: sub-section (16) links with section 206 (computation/use of book profit). The Clause prescribes that relevant shipping book profit or loss is to be excluded from book profit for section 206 purposes. Other cross-references - for example, to definitions such as "qualifying ship", "tonnage tax company", or procedural rules - are Not stated in the document. References to notifications and parliamentary laying follow standard legislative procedure but do not identify subordinate rules or forms; those are Not stated in the document.

Practical Implications

• Compliance and risk areas grounded in the Clause: ensuring correct segregation of core vs incidental activities; monitoring incidental income relative to the 0.25% threshold; documenting transfers between tonnage and other business at market value or maintaining supporting valuations to withstand AO scrutiny under sub-section (9)-(11); contemporaneous allocation methods for shared costs and depreciation in mixed-use assets per sub-sections (14)-(15).
• Record-keeping/evidence: maintain detailed accounts of core activity turnover to calculate the 0.25% threshold; contracts and agreements (pooling arrangements, contracts of affreightment) and terms; market value evidence for inter-business transfers; allocation methodology documentation for common costs and depreciation; and contemporaneous justification where Assessing Officer is required to adopt or review "reasonable basis".

Key Takeaways

• The Clause defines "relevant shipping income" as profits from enumerated core and incidental shipping activities for tonnage tax purposes.
• Incidental income exceeding 0.25% of core turnover is excluded from the tonnage tax measure and taxed under general provisions.
• Core activities specifically include qualifying ship operations and listed ship-related trades (pooling, contracts of affreightment, passenger on-board revenue, container shipping services).
• Transfers between tonnage and non-tonnage businesses are to be tested against market value; Assessing Officer may adopt reasonable basis where computation is exceptionally difficult.
• Losses in relevant shipping income are ignored for tonnage income computation; common costs and depreciation for non-exclusive assets must be reasonably allocated.
• The book profit/loss from relevant shipping activities is expressly to be excluded from the company's book profit for section 206 computations.
• The Central Government retains power to exclude or limit inclusion of listed activities by notification subject to parliamentary procedure.

Differences between Clause 228 of the Income-tax Bill, 2025 - (Old Version) and Section 228 of the Income-tax Act, 2025

Comparison based solely on the provided documents reveals primarily drafting and one substantive cross-reference change:

• Drafting/wording changes: Minor phrasing differences appear in sub-section (4) introductory wording ("In sub-section..." vs "For the purposes of sub-section...") and in sub-section (7) ("as prescribed for the purpose" vs "as may be prescribed for the purpose"). These are stylistic and do not materially change scope.
• Substantive cross-reference change: Clause 228 (Bill) sub-section (16) refers to "the purposes of section 206" generally; Section 228 (Act) refers more specifically to "the purposes of section 206(1)(c)".
  • Practical impact: the Act's more specific cross-reference narrows the provision's structural application to a particular sub-clause of section 206 (presumably the clause dealing with a particular computation of book profit). This narrows the operational effect and reduces ambiguity as to which part of section 206 the exclusion applies to. The Bill's broader reference could be read to exclude from multiple or all computations u/s 206; the enacted text confines the exclusion to a specific sub-provision. Any further implications depend on the content of section 206(1)(c), which is Not stated in the document.
• Other provisions, thresholds, definitions and AO powers remain substantively the same between the two texts provided.

Practical impact of the differences

• Operational certainty: The Act's specific reference to section 206(1)(c) provides greater precision on which book-profit computation the exclusion affects; taxpayers and tax authorities will have clearer guidance for compliance and assessment. Exact consequences depend on section 206(1)(c)'s scope (Not stated in the document).
• Administrative effect: Minor drafting changes do not materially alter Assessing Officer powers or taxpayer obligations under the Clause as presented in the Bill. The main compliance tasks-segregation of incomes, valuation on transfers, allocation of costs-remain required under both texts.

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Full Text:

Section 228 Relevant shipping income and exclusion from book profit.

Relevant shipping income exclusion from book profit narrowed to a specific book profit computation, clarifying tonnage tax scope and compliance. Relevant shipping income comprises profits from enumerated core ship operations and prescribed incidental activities for a tonnage tax company; incidental receipts above the prescribed threshold are excluded from the tonnage measure and taxed generally. Transfers between tonnage and non tonnage businesses are to be tested at market value or, where impracticable, computed on a reasonable basis by the Assessing Officer. Common costs and depreciation must be reasonably allocated, losses in relevant shipping income are ignored for tonnage computation, and the book profit or loss from relevant shipping activities is excluded from the company's book profit for the specified computation under section 206.