DIFFERENT PURPOSES
OF
VALUATION
BY
ER. SUNDEEP BANSAL
PURPOSE OF VALUATION
Purchasing for Investment
Purchasing for self Occupation
Revision of Capitals
Interim Reports of Execution of Buildings or
other structures.
Compensation for land Acquisition
Present Value of Old Properties
Arbitration
Assessing property Tax
Income Tax, Wealth Tax
Gift Tax, Capital Gains
Selling
Mortgaging
Collateral Security
Auctioning
Insurance
Court fee stamp
Partitions
Stamp Duty
Rent Fixation. etc.,
etc.
All the above purpose of valuation has been divided into six
major categories, each category is discussed in detail.
1. Taxation
2. Finance
3. Industrialist
4. Statute
5. Personal planning
6. Social Responsibilities.
1. TAXATION
a) Income Tax
There is no Income Tax an Capital Gains Tax liability on
business enterprise consequent to revaluation of assets.
b) Wealth Tax
Now, wealth Tax is payable by all the assessee except Co-
op. Societies, social club, political parties, specified mutual
fund and non profit objective institution.
From Assessment year 1993-94 there is no Wealth Tax
Liability on unlimited value of Wealth in the form of shares
in the company as these assets are outside the purview of
Wealth Tax.
For the very first time from assessment year 1993-94
agricultural land and farm houses are going to be taxed.
Similarly surplus land/unbuilt areas of factory would also
be taxed.
To avoid excess payment of wealth tax and/or recovery it is
desirable to get valuation done of agricultural land and
farm houses as well as vacant land and surplus land with
specific regulations governing those properties.
c) Gift Tax
To avoid wrong computation of gifts made it is desirable to
have a valuers report. It would help to avoid payment of
excess tax, penalties and prosecution. This is very
important whenever movable/immovable properties are
transferred to relatives and it is likely to attract provision of
deemed gift.
As part of tax planning. Whenever a will is made life interest
are created in it, it is desirable to take advantage of valuers
report more particularly so whenever assets are inherited.
d) Capital Gain
The New Section 48 of Finance Act 1992 has given a
different set of rules to work out Capital gain after
ascertaining market value as on 1st April 1981 which is
referred as Indexed Cost of Acquisition similarly indexed
Cost of Improvement in property is to be considered, thus
capital gain shall be on a different principal and as such a
valuers report as on 1st April 1981 has become absolutely
essential for properties purchased or inherited prior to
1981 for properties sold on or before 31st March 2017 as
on 1st April 2001 has become absolutely essential for
properties purchased or inherited prior to 1981 for
properties sold after 01st April 2017
e) Partnership dissolution.
As such any dissolving partnership firm should go in for a
valuers report on the day of dissolution and valuation
should be done preferably by a registered valuer
empanelled with Income Tax Department.
f) Rent vis-à-vis depreciation
Depreciation is not available on the cost of land and as
such as a part of tax planning normally land is purchased by
one assesse and is given on rent to another assesse. There is
always a difference of opinion as to how much rent is to be paid
and as such it is desirable to have an expert valuers report on
rent to be paid to substantiate your claim.
g) Seizure of Jewellery
To avoid seizure of jewellery at the time of income tax raids,
it is desirable to have separate valuation for separate
jewellery for each family member. It is mandatory to have
valuation done form a government approved valuer, if
market value of jewellery exceeds Rupees five lacs.
h) Reassessment unjustified
Under the provision of “Reassessment in Income Tax Law”.
A residential house was purchased and along with the
return of income tax a valuers report was enclosed. After
some time during investigation in other case it was felt that
reassessment is necessary because probable agreement
value was not the fair market value, however, in the above
referred case reassessment was unjustified.
i) Transfer of Property
If you are buying or selling immovable property, exceeding
Rs. 10 lacs together with plant, machinery, furniture,
fixtures or other things including rights therein
like membership of Co-op Society etc. etc. in any of the
cities viz. Delhi, Mumbai, Calcutta, Chennai, Banglore,
Lucknow, Amhedabad. Then it is obligatory to the
transferor and transferee to obtain permission under
section 269 of Income Tax Department.
Under Chapter XXC i.e., Income Tax Acquisition, Supreme
Court has given a decision with special reference to
“encumbrances and leasors rights etc.” However, has given
a directive that Transferor and Transferee should be served
a show cause notice to give natural justice to avoid
violation of article 14 of the constitution.
It is desirable to substantiate your claim, of correct price
with the help of valuers report who is an expert in doing
necessary valuation.
2) FINANCE
a) Purchase, sale, take over, merger
Whenever you are purchasing or selling or going in for
amalgamation or taking over of a company you may need
financial assistance from the bank or otherwise also to
avoid addition of unexplained investment it is desirable to
justify the transaction by obtaining on exhaustive, detailed
valuers report.
b) Term loan or Cash Credit facility
Books of account are reflecting invariably historic
depreciated value of machinery and plant, however, which
are free from encumbrances, similarly book value of landed
properties also appear to be historic because of
inflationary
trends which are also free from mortgage can be better
utilised to avail either term loan and/or cash credit
facilities to make company financially healthy.
c) Bank Guarantee
Industrialist, business man, contractor, individual are
required on many occasion to offer bank guarantee for
different purpose and as such it is desirable to revalue the
assets and incorporate them in the books of account to
reflect high net worth of the company person soliciting bank
guarantee. Revalued assets can be offered as co-lateral
security to financial institution for offering bank guarantee.
d) Window dressing
International accounting standard expects to reflect true
value of assets in the books of account as a fair business
practise which would help share holders of company,
vendors of company, bankers of company to know
soundness of company and as such revaluation of assets at
a regular interval of three to five years is strongly
recommended.
e) Devaluation of rupee
Now that we are approaching free economy and rupee is
partially convertible till the time market are settled and our
finance position improves effect of devaluation of rupee
cannot be ignored more particularly so wherever imported
machines were procured prior to devaluation and are
installed and where technology has not become obsolute it
is desirable to get these machines revalued and bring it to
the books of account.
f) New issues
An existing company when intending to go in for expansion
and is desirous to go in for public to raise capital, it would
be in fitness of the thing to revalue assets prior to
launching new issue, thereby increasing intrinsic value of
shares. In fact this would help in fixation of higher
premium amount charged by promoters attempting to
bring public issue.
g) Advance against works contract
In some tenders floated by government departments, public
undertaking, advance is given to contractor as he is
expected to deploy some machinery for execution of said
works. For claiming such advance a valuer report is
solicited. In fact machinery deployed need not be new,
advance is also given against deployment of old machinery,
however, quantum of advance may be different for
procurement of new machinery and deployment of old
machines.
h) Incentives
While shifting an industry to backward area or no industry
zone certain percentage of old machinery is allowed to be
shifted without loss of incentives, however, agency who are
offering these incentives have incorporated a condition that
value of such machines should not exceed permissible
percentage of total capital employed in the industry. In
order to substantiate our incentive claim, it is desirable to
support it by valuers report.
i) Security deposit for Electric Company
Due to inflation, cost of input for generation of electricity
and the increase in government duty and cost of overhead,
ultimately increases electricity charges. All electric supply
companies are taking security deposit approximately
equivalent to three months consumption.
Impact of this deposit is very much felt by heavy power
consumers like foundaries, heavy engineering industry,
continuous process industry etc., etc.
In one typical case an industry has succeeded in offering
mortgage of fixed assets by creating a second charge on it,
as an alternative to security deposit. In fact second charge
was created as assets were already mortgaged to the bank
and liability of the bank was less than actual market value
of assets.
INDUSTRIALIST
a) Foreign Collaboration
If one is making an attempt to have foreign collaboration.
As part of pre-planning/ preparation it is desirable that
assets are revalued and incorporated in the books of
account to give better impression of the company.
b) Custom Duty
If a second hand machine is imported the invoice value is
disputed by custom authority as they are interested in
getting proper revenue for Government. To claim the
correctness of invoice value it would be beneficial to have a
valuer report.
c) Octroi
Local self governments are levying octroi on goods brought
into their area. Percentage of octroi to be levied is
incorporated in the rules, however, this levy is based on
invoice value and this invoice value is always disputed with
a view to increase revenue for local self government.
Assessing Officers of octroi are not technical persons and
have hardly any expertise, however, valuers empanelled
with local self government reports should be obtained in
order to make correct payment of octroi.
d) Auction
In advance countries share holders are very vigilant and as
such limited companies going in for disposal of capital good
and its scrap or residual commodities are auctioned only
after soliciting valuer written opinion. With the advent of
free economy in our country it is high time that all the
public limited companies also fall in line with it.
e) Vacating Premises
Some time it is necessary to delay vacation of premises
and such occasion means squaring account of vendor and
retrenchment of employee and in all probability closure and
winding of unit. Valuers have come to rescue to delay the
eviction.
f) Rent of machine
Whenever an imported machine is installed and is used as a
hired one, Compensation/rent to be paid is to be justified at
any given point of time and can have fluctuations also this is
more particularly so when effect of devaluation of rupee is
noticed and under these circumstances it is desirable, that
a valuer is working out the rent that is just and fair as a
compensation for hired machine.
g) S.S.I. registration
Small scale industries are granted necessary registration
based on capital employed in fixed assets. S.S.I. registered
units have certain advantages from various authorities and
as such it is very important to have S.S.I. registration
to
S.S.I. unit. Valuers opinion is attached as a document to
justify that capital employed does not exceed permissible
limit.
h) Where there is no bill
Sometime machine are fabricated/tailor made to suit to the
requirement of an industry. In fact only direct labour cost
of fabrication and material is incorporated. Cost of
technical know how and probable profit if it is purchased
from outside with various duties is not included in capital
assets, it is desirable to do valuation of such machine to
incorporate them in the books of account.
i) Adequate and timely insurance
General Insurance business Nationalisation Act 1972 was
incorporated making all insurance company as government
undertaking with effect from 13th May [Link] to
nationalisation underwriting of insurance was done only
after assessing insurable interest, commonly referred as
sum insured i.e., insures liability, however, after
nationalisation sum insured responsibility is vested with
the insurer.
Insured comes to know of this said fact only when claim is
made and it is determined as sub standard, either for over
valued or under valued and as such it is absolutely must
that exhaustive detailed report is forwarded along with
proposal form to insurance company to protect desired
insurance interest of the insured. Advanced countries
are following the system stated above.
4) STATUTE
a) Stamp duty
Under TamilNadu Stamp Duty Act document becomes
valid only if necessary stamp is affixed to document prior
to its signature and as per Transfer of Property Act,
document so executed it to be registered with sub-
registrar.
Government of TamilNadu and other state governments
has given directive and has fixed price of land by
adopting Book of Rates as to how much should be the
value for stamp purpose which invariably is the highest
amount and not real transaction value and as such to
substantiate one’s claim one is expected to submit
valuers report to avoid excess payment of stamp duty.
b) Land Acquisition Act 1984
Government acquire land for public utility and pay
compensation as per Land Acquisition Act 1984.
Even after incorporation of necessary amendments
compensation paid to an unwilling seller is very very low
and invariably litigation takes places.
Provisions of said Act are so absurd that it does not
discriminate large scale acquisition of land and a small
property acquired.
Now valuation, is a complex field and has an impact of
economy, legal and technical, etc. etc. and as such role
of a valuer has become inevitable.
c) Official Liquidator
Official Liquidator solicits values report with a view to
understand that if company is in liquidation willingly or
unwillingly, if thrown open to market for auction what price
it would fetch.
5) PERSONAL PLANNING
a) Charity Commissioner and Registrar of Co-op.
Societies Whenever a charity trust or Co-op Society is
buying or selling any capital goods, equipment, factory
and/or property one is required to solicit permission in
advance and for that purpose valuation report is also
solicited.
b) Personal Planning through will
If property is to be transfered to a particular person,
interest of life is created through will to avoid legal
problems at a later date which is invariably supported
with valuers report.
c) Visas
To establish the fact that you have sufficient stake in
the country, it is desirable to substantiate your claim
by providing an evidence of fair market value of you
assets instead of book value.
d) Perks
Senior manager or directors of the company are
provided with furnished flat including various gadgets
with a view to give him an indirect benefit, however,
these items cannot be given as it is to the retiring
person and as such a proper valuation reports is
obtained for debiting net value of these facilities from
the amount payable to the retiring person.
e) Housing Loan
While procuring loans for housing, valuation report is
necessary.
f) Family partition
Property of joint family when subject to partition valuers
opinion is obtain to facilitate smoother division. His
views are of importance if multi storeyed building is to
be offered at a realistic value to members of family.
g) Divorce Settlement
In typical case of divorce if a property is good and
sufficient it is invariably valued before divorce settlement
is made.
6) SOCIAL RESPONSIBILITIES
a)It is time now, when a member of parliament may
take services of expert valuers team to know actual
investment incurred on Road Works. Tube wells/
Irrigation / Housing / Public Sector undertaking etc.
etc. within a very short period and raise question in
parliament budget session to the concerning minister
and play important role in future development of the
country.
