Chapter XIII - Determination of Tax in Special Cases
Section 234
Section 234: avoidance of tax and exclusion from the tonnage tax scheme
Section 234 is the anti-avoidance safeguard for the tonnage tax scheme: it denies the scheme's benefit where a tonnage tax company is party to a transaction or arrangement that amounts to an abuse of the scheme, and gives the Assessing Officer power to formally exclude such a company.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Subject to the provisions of this Part, the tonnage tax scheme shall not apply where a tonnage tax company is a party to any transaction or arrangement which amounts to an abuse of the tonnage tax scheme.
(2) For the purposes of sub-section (1), a transaction or arrangement shall be considered an abuse, if the entering into or the application of such transaction or arrangement results, or would but for this section have resulted, in a tax advantage being obtained for—
(a) a person other than a tonnage tax company; or
(b) a tonnage tax company in respect of its non-tonnage tax activities.
(3) For the purposes of this section, “tax advantage” includes—
(a) the determination of—
(i) the allowance for any expense or interest; or
(ii) any cost or expense allocated or apportioned, which has the effect of reducing the income or increasing the loss, from activities other than tonnage tax activities chargeable to tax, computed on the basis of entries made in the books of account in respect of the tax year in which the transaction was entered into; or
(b) a transaction or arrangement which produces to the tonnage tax company more than ordinary profits which might be expected to arise from tonnage tax activities.
(4) Where a tonnage tax company is a party to any transaction or arrangement referred to in sub-section (1), the Assessing Officer shall, by an order in writing, exclude such company from the tonnage tax scheme.
(5) The Assessing Officer shall pass an order under sub-section (4), after––
(a) giving an opportunity to the company by serving a notice calling upon such company to show cause, on a date and time to be specified in the notice, why it should not be excluded from the tonnage tax scheme; and
(b) obtaining prior approval of the Principal Chief Commissioner or Chief Commissioner.
(6) The provisions of this section shall not apply where the company satisfies the Assessing Officer that the transaction or arrangement was a bona fide commercial transaction and had not been entered into for the purpose of obtaining tax advantage under this Part.
(7) Where an order has been passed under sub-section (4) by the Assessing Officer excluding the tonnage tax company from the tonnage tax scheme, the option for tonnage tax scheme shall cease to be in force from the first day of the tax year in which the transaction or arrangement was entered into.
Introduction
The tonnage-tax option can be withdrawn for a transaction or arrangement that abuses the scheme. The Assessing Officer’s exclusion order follows the stated process and takes effect from the first day of the tax year of the abusive arrangement.
Key takeaways
Abuse can end the scheme
An arrangement amounting to abuse of tonnage taxation can lead to the company’s exclusion from the scheme.
Written order and process
The Assessing Officer must follow the section’s approval and hearing process before making an exclusion order.
Effective tax year
The option ceases from the first day of the tax year in which the abusive arrangement was entered into.
What counts as abuse
The tonnage tax scheme does not apply where a tonnage tax company is party to a transaction or arrangement amounting to an abuse of the scheme. A transaction or arrangement is treated as an abuse if entering into it, or applying it, results (or would have resulted) in a tax advantage for a person other than a tonnage tax company, or for a tonnage tax company in respect of its non-tonnage-tax activities.
"Tax advantage" includes any determination of expense/interest allowance or cost apportionment that reduces income or increases loss from non-tonnage-tax activities, computed from the company's books for the tax year the transaction was entered into, and also includes a transaction that produces more than ordinary profits that might be expected from tonnage tax activities.
Exclusion procedure
Where a tonnage tax company is party to such a transaction or arrangement, the Assessing Officer, by a written order, excludes the company from the tonnage tax scheme.
Before passing that order, the Assessing Officer must give the company an opportunity to show cause, by serving a notice specifying a date and time, and must obtain prior approval of the Principal Chief Commissioner or Chief Commissioner.
This exclusion does not apply if the company satisfies the Assessing Officer that the transaction or arrangement was a bona fide commercial transaction and was not entered into to obtain a tax advantage under this Part.
Effect of an exclusion order
Where an exclusion order is passed, the tonnage tax option ceases to be in force from the first day of the tax year in which the abusive transaction or arrangement was entered into.
Step-by-step flow for exclusion from the tonnage tax scheme under Section 234
- 1
Is a tonnage tax company a party to a transaction or arrangement?
Identify the transaction or arrangement and the tax year in which it was entered into.
- 2
Does it give, or would it but for Section 234 give, a tax advantage to a person other than a tonnage tax company, or to the tonnage tax company for its non-tonnage tax activities?
Under Section 234(3), "tax advantage" includes an expense, interest, cost or allocation that reduces the income (or increases the loss) from non-tonnage tax activities, and a transaction that gives the company more than the ordinary profits expected from tonnage tax activities.
- No: It is not an abuse under Section 234(2); the section does not apply.
- Yes: Go to the next step.
- 3
Can the company satisfy the Assessing Officer that it was a bona fide commercial transaction, not entered into to obtain a tax advantage under this Part?
- Yes: Under Section 234(6) the section does not apply.
- No: Go to the next step.
- 4
Has the Assessing Officer followed the procedure?
Before an order under Section 234(4), Section 234(5) requires a show-cause notice naming a date and time, and the prior approval of the Principal Chief Commissioner or Chief Commissioner. The order excluding the company must be in writing.
- 5
From when does the exclusion operate?
Under Section 234(7) the option ceases to be in force from the first day of the tax year in which the transaction or arrangement was entered into, not from the date of the order.
Practical checklist
Do
- Examine the commercial purpose of any tonnage-tax transaction or arrangement.
- Keep the notice, response and exclusion order if anti-abuse action is proposed.
Avoid
- Treat an abusive arrangement as eligible simply because the company had a valid initial tonnage option.
Illustrative example
Worked example: shifting common costs to non-tonnage activities
Hypothetical facts (illustration only, not a real taxpayer): Marine Co Ltd is a tonnage tax company. It also carries on an activity that is not a tonnage tax activity. In the tax year beginning 1 April 2027 its books allocate the whole of its common office cost of an assumed ₹40 lakh to the non-tonnage activity. An assumed usage-based split would put only ₹10 lakh there.
Effect on income
The extra cost charged to the non-tonnage activity is ₹40 lakh − ₹10 lakh = ₹30 lakh. This reduces the income from activities other than tonnage tax activities, which is a tax advantage under Section 234(3)(a)(ii).
Abuse test
The advantage is obtained by the tonnage tax company for its non-tonnage tax activities, so the arrangement falls within Section 234(2)(b).
Bona fide defence
The company can avoid exclusion if it satisfies the Assessing Officer under Section 234(6) that the allocation was a bona fide commercial arrangement, not made to obtain a tax advantage under this Part. Here it cannot explain the basis of the allocation.
Procedure and effect
After a show-cause notice and prior approval of the Principal Chief Commissioner or Chief Commissioner, the Assessing Officer passes a written exclusion order. Even if the order is passed in a later year, the option ceases from 1 April 2027 under Section 234(7).
Outcome
- The company is excluded from the tonnage tax scheme from the first day of the tax year in which the arrangement was entered into.
- The ₹40 lakh and ₹10 lakh figures are assumed; Section 234 does not prescribe any allocation method.
Frequently asked questions
Can the Assessing Officer exclude a company from the tonnage tax scheme without a hearing?
No - Section 234(5) requires the Assessing Officer to first issue a show-cause notice to the company and obtain prior approval of the Principal Chief Commissioner or Chief Commissioner before passing an exclusion order.
Is a genuine commercial transaction at risk of triggering exclusion?
No - Section 234(6) protects transactions the company can show were bona fide commercial transactions not entered into to obtain a tax advantage under the scheme.
From when does the exclusion take effect?
From the first day of the tax year in which the abusive transaction or arrangement was entered into, not merely from the date of the exclusion order.
Need help applying this provision to your situation?
Talk to our tax team about tonnage tax scheme complianceLast updated 9 October 2026