CEV EDUCATION SERIES

DIFFERENT PURPOSES OF VALUATION

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. 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.

3) 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.

1. g) 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 1971.Prior 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.

1. 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.

COMPILED BY:-

ER. SUNDEEP BANSAL

B. E. (CIVIL), M. TECH. (STRUCTURAL ENGINEERING), DIPLOMA IN CONSTRUCTION MANAGEMENT, DIPLOMA IN FINANCIAL MANAGEMENT, SIX MONTHS COURSE IN VALUATION OF REAL ESTATE, PHD SCHOLAR, REGISTERED VALUER (LB), QUALIFIED INDEPENDENT DIRECTOR FROM IICA, MINISTRY OF CORPORATE AFFAIRS, NOMINATED AS A MEMBER OF INDEPENDENT EXPERT COMMITTEE FOR EVALUATING THE SOLUTIONS/ COURSES OF NEAT 2.0 by AICTE, MINISTRY OF EDUCATION, GOVERNMENT OF INDIA.

Having more than 25 years of Experience in Technical Field, Monitoring, Administration & Liaison as a member of Committees, Valuation of Immovable Properties, etc.