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TMI BlogDepreciation and Asset Classification under Tonnage Tax : Clause 229(1)-(7) of the Income Tax Bill, 2025 Vs. Section 115VK of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... ereby offering predictability and administrative ease. However, the application of this regime necessitates special rules for the treatment of depreciation and capital gains relating to assets used in the shipping business, particularly in distinguishing between qualifying and non-qualifying assets. Clause 229 of the Income Tax Bill, 2025, and Section 115VK of the Income-tax Act, 1961, both address the computation of depreciation and related adjustments for shipping companies under the tonnage tax regime. This commentary provides a detailed analysis of Clause 229(1) to (7) of the 2025 Bill, compares each provision with its counterpart in Section 115VK, and examines the legal and practical implications for stakeholders. Objective and Purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Analysis: Both provisions establish a clear starting point for depreciation calculation under the tonnage tax regime. The intent is to reset the depreciation base in the year of transition, ensuring that only the value attributable to qualifying ships is considered for the tonnage tax computation. There is no substantive difference between the two; both focus on the need for a fresh calculation based on the status of assets at the commencement of the regime. 2. Apportionment of Written Down Value: Clause 229(2) vs. Section 115VK(2)-(4) Clause 229(2): The WDV of the block of assets (ships/inland vessels) as on the first day of the first tax year is divided between qualifying and non-qualifying assets using a formula: D = A x B/(B+C) E = ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Chapter. Analysis: Both provisions reinforce the principle that qualifying and non-qualifying assets are to be treated independently for depreciation purposes. This prevents cross-subsidization or misallocation of depreciation, ensuring that only assets used in the tonnage tax business benefit from the special regime. The language in both is consistent, though the Bill refers to "this Part" and the Act to "this Chapter," reflecting structural differences in the legislation. 4. Reclassification of Assets: Clause 229(4) vs. Section 115VK(5)-(6) Clause 229(4): Addresses two scenarios: * (a) If a qualifying asset is used for non-tonnage tax business, an appropriate portion of its WDV is transferred from the qualifying block to the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clear and unambiguous, and aligns with standard accounting principles of matching expenses to usage. 6. Continuity of Depreciation Claims: Clause 229(6) vs. Explanation 1 to Section 115VK(7) Clause 229(6): Declares that depreciation on the blocks of qualifying and other assets is allowed as if the WDV referred to in sub-section (2) had been brought forward from the preceding tax year. Section 115VK, Explanation 1: Contains an almost identical declaration for removal of doubts, ensuring continuity in depreciation claims. Analysis: This provision addresses a potential ambiguity regarding whether the new WDV blocks are considered a continuation or a fresh start for depreciation purposes. By deeming the WDV as brought forward, the law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsures that companies cannot artificially inflate depreciation claims by revaluing assets. * Continuity and Certainty: The provisions for bringing forward WDV and clear definitions provide certainty for companies planning capital expenditure and tax liabilities over multiple years. * Potential for Litigation: Ambiguities or errors in calculation, particularly in the absence of anti-abuse provisions in the new Bill, could lead to increased scrutiny and litigation. Comparative Analysis and Unique Features A close comparison reveals that Clause 229 of the 2025 Bill largely tracks the structure and intent of Section 115VK, with some notable differences: * Formulaic Clarity: The Bill provides explicit mathematical formulas for WDV alloca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The principal points of comparison are as follows: Aspect Section 115VK of the Income-tax Act, 1961 Clause 229 of the Income Tax Bill, 2025 Key Differences First Year Depreciation Base WDV as per sub-section (2) for "first previous year" WDV as per sub-section (2) for "first tax year" Terminology updated; substance unchanged Division of WDV Narrative description; explanations for ratios Explicit formulas codified in the section Greater clarity and precision in Clause 229 Separate Block of Assets Mandated Mandated No substantive change Asset Movement Between Blocks Explained via proportional allocation; explanations Formulas directly embedded in main text Improved transparency and ease of applic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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