Section 33AC of the Income Tax Act, 1961 – Reserves for shipping business
Section 33AC (1) states that according to and subject to the provisions of this section, a deduction of up to 50% of profits from the business of operating ships (calculated under the head "Profits and gains of business or profession" and prior to making any deductions), debited to the profit and loss account of the previous year regarding which the deduction is allowed and credited to a reserve account, utilised in the manner laid down in sub-section (2), shall be allowed in the case of the assessee, being a Government company or a public company formed and registered in India with the primary objective of carrying on the business of operating ships.
However, no allowance under this sub-section is made regarding such excess where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the aggregate of the amounts of the paid-up share capital, general reserves, and amount credited to the assessee's share premium account.
This sub-section must apply as if the words "an amount not exceeding fifty per cent of profits" had been replaced with the words "an amount not exceeding the profits" for the five assessment years beginning on or after April 1, 2001 and ending before April 1, 2006. Also, no deduction will be permitted under this section for any assessment year starting on or after April 1, 2005.
According to Section 33AC (2) the assessee must use the amount credited to the reserve account under section 33AC (1) before the term of eight years that follows the previous year in which the amount was credited expires –
for purchasing a new ship for the assessee's business; and
up till the purchase of a new ship, for the assessee's business purposes other than for dividend or profit distribution, remittance as profits beyond India, or the establishment of any asset outside India.
As per Section 33AC (3), when any sum is credited to the reserve account pursuant to section 33AC (1) in the given cases, they will be regarded as profits and taxed:
In the year when the amount was used, when it has been used for any purpose other than those mentioned in clauses (a) or (b) of sub-section (2); or
In the year that immediately follows the eight-year term mentioned in sub-section (2), when the amount hasn't been used for the purpose listed in clause (a) of sub-section (2); or
In the year when the transfer or sale occurred, when the amount has been used to purchase a new ship as described in clause (a) of sub-section (2), but if the ship is sold or otherwise transferred by the assessee to any person, but not in any scheme of demerger, before the period of three years from the end of the previous year in which it was purchased.
Lastly, section 33AC (4) provides that if the ship is sold or otherwise transferred (other than in a demerger scheme) after the time period specified in clause (c) of sub-section (3) and the sale proceeds are not used to purchase a new ship within a year of the sale or transfer, then the portion of the sale proceeds that corresponds to the amount credited to the reserve account and used for the purposes mentioned in clause (c) of sub-section (3) must be regarded to be the profits of the assessment year that comes just after the year that the ship is sold or transferred.
To better understand this section an explanation has been attached to it, elucidating the meaning of certain terms:
"Public Company" has the same meaning as it has in section 2 (71) of the Companies Act, 2013.
"Government company" has the same meaning as it has in section 2 (45) of the Companies Act, 2013.
"New Ship" has the same meaning as it has in clause (ii) of section 32AB (2).