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PRINCIPLES OF VALUATION

DEFINITION OF COST, PRICE AND VALUE

         
Cost :   It is the expenditure to produce a commodity having a value. In our construction Industry cost means the original cost of the construction including the cost of materials and labour. Hence the cost is a FACT.
Price :   It is the cost of a Commodity plus additional reward to the producer for his labour and Capital. In our construction industry the original cost of construction with certain percentage of profit. The profit or additional reward may be varied from Builder to Builder, and Business to Business because the Price is a POLICY.
Value:  Valuation is an opinion or an estimate which will be determined by many factors like the purpose, supply, demand, depreciation, obsolescence etc. Valuation is a function of place, date and purpose.

DIFFERENT KINDS OF PROPERTIES

           

  • Land and Building
  • Agricultural lands
  • Coffee, Tea, Rubber plantations.
  • Forest
  • Mines and Quarries
  • Stocks, Shares, Debentures
  • Plant & Machinery
  • Jewellery
  • Works of Arts & Craft

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.

  • Taxation
  • Finance
  • Industrialist
  • Statute
  • Personal planning
  • Social Responsibilities.

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.
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 assessee and is given on rent to another assessee. 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.

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

            Ia) 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 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.

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.

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.

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.