Section 232 — Certain conditions for applicability of tonnage tax scheme

(1) A tonnage tax company shall, subject to and as per the provisions of this
section, be required to credit to a reserve account (herein referred to as the
Tonnage Tax Reserve Account) an amount, being 20% or more of the book profit
derived from the activities referred to in section 228(1)(a) and (b) in each tax year
to be utilised in the manner laid down in sub-section (6).
(2) For the purposes of this section, the expression “book profit” shall have the
meaning assigned to it in section 206(1)(c) so far as it relates to the income derived
from the activities referred to in section 228(1)(a) and (b).
(3) Where the company has—
( a) book profit from the business of operating qualifying ships; and
( b) book loss from any other sources,
and consequently, the company is not in a position to create the full or any part
of the reserves under sub-section (1), the company shall create the reserves to the
extent possible in that tax year and the shortfall, if any, shall be added to the reserves
required to be created for the following tax year and such shortfall shall be deemed
to be part of the reserve requirement of that following tax year.
(4) For the purposes of sub-section (3), to the extent the shortfall in creation of
reserves during a particular tax year is carried forward to the following tax year
under the said sub-section, the company shall be considered as having created
sufficient reserves for the first mentioned tax year.
(5) For the purposes of sub-section (3), nothing contained in sub-section (4) shall
apply in respect of the second year in case the shortfall in creation of reserves con-
tinues for two consecutive tax years.
(6) The amount credited to the Tonnage Tax Reserve Account under sub-section (1)
shall be utilised by the company before the expiry of eight years following the tax
year in which the amount was credited—
( a) for acquiring a new ship or new inland vessel, as the case may be, for
the purposes of the business of the company; and
( b) until the acquisition of a new ship or new inland vessel, as the case may
be, for the purposes of the business of operating qualifying ships other
than for distribution by way of dividends or profits or for remittance
outside India as profits or for the creation of any asset outside India.
(7) Where any amount credited to the Tonnage Tax Reserve Account under sub-sec-
tion (1),—
( a) has been utilised for any purpose other than that referred to in sub-sec-
tion (6); or
( b) has not been utilised for the purpose specified in sub-section (6)(a); or
( c) has been utilised for the purpose of acquiring a new ship or new inland
vessel, as the case may be, as specified in sub-section (6)( a), but such
ship or inland vessel, as the case may be, is sold or otherwise transferred,
other than in any scheme of demerger by the company to any person at
any time before the expiry of three years from the end of the tax year in
which it was acquired,
an amount which bears the same proportion to the total relevant shipping income
of the year in which such reserve was created, as the amount out of such reserve
so utilised or not utilised bears to the total reserve created during that year under
sub-section (1) shall be taxable under the other provisions of this Act—
( i) in a case referred to in clause (a), in the year in which the amount was
so utilised; or
( ii) in a case referred to in clause ( b), in the year immediately following
eight years specified in sub-section (6); or
( iii) in a case referred to in clause (c), in the year in which the sale or transfer
took place.
(8) The income so taxable under the other provisions of this Act, referred to in
sub-section (7), shall be reduced by the proportionate tonnage income charged to
tax in the year of creation of such reserves.
(9) Irrespective of anything contained in any other provision of this Part, where
the amount credited to the Tonnage Tax Reserve Account as per sub-section (1) is
less than the minimum amount required to be credited under sub-section (1), an
amount which bears the same proportion to the total relevant shipping income, as
the shortfall in credit to the reserves bears to the minimum reserve required to be
credited under sub-section (1), shall not be taxable under the tonnage tax scheme
and shall be taxable under the other provisions of this Act.
(10) If the reserve required to be created under sub-section (1) is not created for
any two consecutive tax years, the option of the company for tonnage tax scheme
shall cease to have effect from the beginning of the tax year following the second
consecutive tax year in which the failure to create the reserve under sub-section
(1) had occurred.
(11) For the purposes of this section, the expression “new ship” or “new inland vessel”,
as the case may be, includes a qualifying ship which, before the date of acquisition
by the qualifying company was used by any other person, if it was not at any time
previous to the date of such acquisition owned by any person resident in India.
40[(12) A tonnage tax company, after its option has been approved under section
231(4), shall comply with the minimum training requirement as per the guidelines
issued by the Director-General of Shipping or the Inland Waterways Authority of India,
as the case may be, and notified by the Central Government.
(13) The tonnage tax company shall be required to furnish a copy of the certificate
issued by the Director-General of Shipping, or the designated authority, as appointed
by the respective State Governments under the Inland Vessels Act, 2021 (24 of 2021),
as the case may be, along with the return of income under section 263 to the effect
that such company has complied with the minimum training requirement as per the
guidelines referred to in sub-section (12) for the tax year.]
(14) If the minimum training requirement is not complied with for any five con -
secutive tax years, the option of the company for tonnage tax scheme shall cease
to have effect from the beginning of the tax year following the fifth consecutive tax
year in which the failure to comply with the minimum training requirement as per
sub-section (12) had occurred.
(15) In the case of every company which has opted for tonnage tax scheme, not
more than 49% of the net tonnage of the qualifying ships operated by it during any
tax year shall be chartered in.
40. Sub-sections (12) and (13) substituted by the Finance Act, 2026, w.e.f. 1-4-2026. Prior to
their substitution, sub-sections (12) and (13) read as under :
“(12) A tonnage tax company, after its option has been approved under section 231(4), shall
comply with the minimum training requirement in respect of trainee officers as per the
guidelines issued by the Director-General of Shipping and notified by the Central Government.
(13) The tonnage tax company shall be required to furnish a copy of the certificate issued
by the Director-General of Shipping along with the return of income under section 263 to
the effect that such company has complied with the minimum training requirement as per
the guidelines referred to in sub-section (12) for the tax year.”
(16) The proportion of net tonnage referred to in sub-section (15) in respect of a tax
year shall be calculated based on the average of net tonnage during that tax year.
(17) For the purposes of sub-section (16), the average of net tonnage shall be computed
in such manner, as may be prescribed, in consultation with the Director- General of
Shipping 41[or Inland Waterways Authority of India, as the case may be].
(18) Where the net tonnage of ships or inland vessel, as the case may be, chartered
in exceeds the limit under sub-section (15) during any tax year, the total income
of such company in relation to that tax year shall be computed as if the option for
tonnage tax scheme does not have effect for that tax year.
(19) Where the limit under sub-section (15) had exceeded in any two consecutive
tax years, the option for tonnage tax scheme shall cease to have effect from the
beginning of the tax year following the second consecutive tax year in which the
limit had exceeded.
(20) For the purposes of this section, the expression “chartered in” shall exclude a
ship or inland vessel, as the case may be, chartered in by the company on bareboat
charter-cum-demise terms.
(21) An option for tonnage tax scheme by a tonnage tax company shall not have
effect in relation to a tax year unless such company—
( a) maintains separate books of account in respect of the business of oper-
ating qualifying ships; and
( b) furnishes, before the specified date referred to in section 63, the report
of an accountant, in the prescribed form, duly signed and verified by
such accountant.
(22) A temporary cessation (as against permanent cessation) of operating any qual-
ifying ship by a company shall not be considered as a cessation of operating of such
qualifying ship and the company shall be deemed to be operating such qualifying
ship for the purposes of this Part of the Chapter.
(23) Where a qualifying company continues to operate a ship or inland vessel, as
the case may be, which temporarily ceases to be a qualifying ship, such ship or
inland vessel, as the case may be, shall not be deemed as a qualifying ship for the
purposes of this Part.