Section 229 Depreciation and gains relating to tonnage tax assets.

Income-tax Act, 2025

At a Glance

Clause 229 of the Income Tax Bill, 2025 (Old Version) prescribes the manner of computing depreciation and treatment of capital gains for assets under the tonnage tax scheme applicable to shipping companies. It defines procedures for splitting written down value (WDV) between qualifying ships and non-qualifying ships, treatment where assets move between businesses, and treatment of capital gains on transfers. The provision affects taxpayers in the shipping industry and the tax department; effective date or enactment date: Not stated in the document.

Background & Scope

Statutory hooks: Clause 229 sits within the Part addressing special provisions relating to income of shipping companies and operates in conjunction with section 230(1)(d) (referred to for depreciation computation). The clause governs (a) computation of depreciation for the first tax year of the tonnage tax scheme, (b) allocation of WDV between qualifying and non-qualifying ships, (c) creation of separate blocks of qualifying assets, (d) adjustment when assets change use between tonnage tax business and other business, (e) allocation of depreciation for part-year use, and (f) treatment of capital gains on transfer of qualifying assets with reference to sections 67 and 74 and sections 67-81 for computation. Definitions provided in the clause: "book written down value" means written down value as per books of accounts; "written down value" means written down value as calculated for purposes of income-tax. The clause does not otherwise define "tonnage tax business," "qualifying ship," or other terms within this text. Not stated in the document.

Statutory Provision Mode

Text & Scope

• Clause 229(1) mandates that for computing depreciation u/s 230(1)(d), the first-year depreciation for the tonnage tax scheme shall be computed on the WDV of qualifying ships determined under sub-section (2).
• Clause 229(2) prescribes an apportionment formula: the WDV (A) of the existing block of assets (ships) as on the last day of the immediately preceding tax year is to be divided between qualifying assets (D) and other assets (E) in proportion to the book WDV of qualifying assets (B) and other assets (C) as on the last day of the preceding tax year, via D = A x B / (B+C) and E = A x C / (B+C).
• Clause 229(3) states that the block of qualifying assets as determined under sub-section (2) shall constitute a separate block of assets for the purposes of the Part (i.e., for depreciation rules).
• Clause 229(4) addresses movements: (a) where a qualifying asset begins to be used for non-tonnage tax business, an appropriate portion of WDV is transferred from the qualifying block to the other block by A = B x C / D (with variables defined in the sub-clause); (b) conversely, where an other asset begins to be used for the tonnage tax business, an apportioned value is moved from the other block to the qualifying block by E = F x G / I (variables defined).
• Clause 229(5) requires allocation of depreciation for assets changing use during a tax year in proportion to days of use in each business.
• Clause 229(6) declares that depreciation on the newly created blocks shall be allowed as if the WDV referred in sub-section (2) had been brought forward from the preceding tax year.
• Clause 229(7) supplies two definitions: "book written down value" and "written down value" (as described above).
• Clause 229(8)-(9) provide that profits/gains on transfer of qualifying assets are chargeable u/ss 67 and 74 and calculated u/ss 67-81; for that purpose section 74 shall operate as if "written down value of the block of assets" were replaced by "written down value of the block of qualifying assets." Clause 229(10) clarifies "written down value of the block of qualifying assets" is as computed under sub-section (2).

Interpretation

The clause adopts an allocation-by-proportion approach: the book WDV split (B and C) as at the last day of the preceding year governs apportionment of the existing fiscal WDV (A) to qualifying and other blocks. Legislative purpose, as discernible from the text, is to align tax depreciation in the first tonnage tax year with accounting distinctions between qualifying and other ships, while preserving continuity for tax WDV by deeming the apportioned WDV had been brought forward. The declared substitution for section 74 ensures capital gains computations reflect the qualifying block's WDV rather than the overall block. The clause indicates an intent to prevent mismatch between book and tax positions when ships move between business uses by prescribing proportional transfers and day-count allocation. No extrinsic legislative history or policy rationale beyond these textual mechanisms is provided. Not stated in the document.

Exceptions/Provisos

No express provisos, exemptions, thresholds, or exceptions are included beyond the mechanics for allocation and transfer on change of use, and the day-pro-rata depreciation allocation for part-year use. Not stated in the document: any caps, transitional time limits beyond "first tax year," or special treatment for leased vessels, second-hand ships, or cross-border issues.

Illustrations

• Example 1 (illustrative application consistent with the text): A block of ships has book WDV B = 60 and C = 40 as at preceding year-end; tax WDV A = 100. Then D = 100 x 60/(60+40) = 60 and E = 100 x 40/(60+40) = 40; qualifying and other blocks are created with those tax WDVs.
• Example 2 (change of use): Within the tax year, a qualifying ship with book WDV C (as described in sub-clause) begins non-tonnage use; the appropriate portion to move to other block is calculated as A = B x C / D (per variables defined in the clause) and depreciation for that tax year on the asset is allocated by days used for each business.
• Example 3 (capital gains): On disposal of a qualifying asset, capital gains are taxed u/ss 67 and 74, with section 74 applied as if reference were to the "written down value of the block of qualifying assets" computed under sub-section (2).

Interplay

The clause expressly interacts with section 230(1)(d) for depreciation computation, and with sections 67 and 74 and sections 67-81 for capital gains charge and computation. No mention is made of specific Rules, Notifications, or Circulars that further elucidate implementation. Not stated in the document: any cross-references to definitions elsewhere in the Act (e.g., definition of "tonnage tax scheme" or "qualifying ship") or to accounting standards.

Differences between the two provisions and practical impact

• Scope language: The Act (Document 1) expressly refers to "ships or inland vessels" in sub-section (2); the Bill (Document 2) refers only to "ships" (with "inland vessels" absent).
  • Practical impact: Inclusion of inland vessels in the enacted text broadens coverage to inland shipping operators who would not clearly have been covered under the Bill's language.
• Temporal reference for A in sub-section (2): The Bill (Document 2) defines A as "the written down value of the existing block of assets, being ships as on the last day of the immediately preceding tax year." The Act (Document 1) describes A as "the written down value of the existing block of assets, being ships or inland vessel, as the case may be, as on the first day of the tax year."
  • Practical impact: The change of reference date from "last day of the immediately preceding tax year" to "first day of the tax year" (and harmonising the asset description with inland vessels) alters the base value used in allocation; administratively this can affect numeric allocation of WDV between qualifying and other blocks and therefore depreciation in the first tonnage-tax year.
• Definitions: The Bill (Document 2) includes two defined terms in sub-section (7): (a) "book written down value" and (b) "written down value" (explicitly defined as written down value as calculated for purposes of income-tax). The Act (Document 1) contains only a definition for "book written down value" in sub-section (7).
  • Practical impact: Omission of the express statutory definition of "written down value" in the enacted section could leave a textual lacuna; however, administrative practice or other statutory definitions elsewhere may supply that meaning. Absent an express definition here, taxpayers and revenue may engage different interpretive approaches to the term when applying the allocation formula.
• Wording concerning brought-forward written down value: The Bill (Document 2) uses clarifying language - "For the removal of doubts, it is hereby declared that..." - in sub-section (6). The Act (Document 1) frames the same rule without the "removal of doubts" preamble.
  • Practical impact: The substantive effect appears the same (treating the created blocks as if WDV were brought forward), but the Bill's declaratory phrase emphasises intent to remove ambiguity; its omission from the Act is stylistic and arguably does not change legal effect.
• Formula presentation and labelling: Both texts supply proportionate allocation formulas for initial division and for movements between qualifying and other assets. The Act's printed formulas in the supplied extraction show slight formatting differences and consistent broader reference to "ships or inland vessels."
  • Practical impact: No substantive change to mathematical approach is evident, but the change in A's reference date (noted above) may change numerical results.
• Miscellaneous drafting differences: Minor variances in phrasing (e.g., passive/active forms) and punctuation occur.
  • Practical impact: Generally drafting-level, except where temporal/reference changes noted above which can influence computation and coverage.

Practical Implications

• Compliance and risk areas: Taxpayers must maintain clear book WDV schedules at the immediately preceding year-end to apply the proportional split; errors in computing B and C or in locating the correct A date will affect first-year depreciation and subsequent tax positions. The clause creates risk around valuation timing and the derivation of "written down value" versus "book written down value" (both defined in the clause), so consistency between accounting records and tax computations is essential.
• Record-keeping/evidence: The text implicitly requires contemporaneous books of account reflecting book WDV by asset, schedules evidencing the last day of preceding tax year book WDV, documentation of dates assets change business use, and day-count records for apportionment of depreciation per sub-section (5). For capital gains, records supporting the substituted WDV of the qualifying block u/s 74 application are necessary.

Key Takeaways

• Clause 229 prescribes proportional allocation of tax WDV between qualifying and other ships using book WDV proportions as at preceding year-end and creates separate qualifying blocks for depreciation.
• Assets changing use require proportional transfer of WDV between blocks using the clause's formulas and day-pro-rata depreciation allocation for the year of change.
• Capital gains on disposals of qualifying assets are charged u/ss 67 and 74, with section 74 applied as if references were to WDV of the qualifying block computed under sub-section (2).
• The clause explicitly defines "book written down value" and "written down value" for purposes of computation.
• Taxpayers must retain precise asset-level book WDV records and date records to apply the formulas and to justify tax computations on audit.

Full Text:

Section 229 Depreciation and gains relating to tonnage tax assets.