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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. 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- agricultural land and farm houses are going to be taxed.
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.
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
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
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 13 th^ 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
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.
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.
Potential Value : It is an inherent value which may go on increasing due to passage of time or some other factor which will fetch more return.
Distress Value : If a property is sold at a lower price than that which can be obtained for it in an open Market, it is said to have “Distress Value”. It may be due to:-
- Financial crisis for the Vendor
- Panic due to War, Riots Earthquake, Floods, etc.,
- Land Locked Land
- Sentimental reasons
- Nuisance. Speculative Value : When the property is purchased so as to sell the same at a profit after some duration, the price paid is known as Speculative Value.
Monopoly Value : In a developed Colony, the value of the plot goes on increasing when number of the available plots goes on decreasing. The fancy price demanded by the Vendor for the remaining plots is known as Monopoly Value.
Sentimental Value : The extra price which is demanded by a Vendor when he attaches certain sentiments to his property is known as Sentimental Value having no relation with the Market Value.
Fancy Value : It is also called as Desired Value. If the Purchaser wants to have a property somehow since the procurement is an absolute necessity for him due to various reasons, he is prepared to pay more sum when compared with others. He attaches a special desire over the said
property. The extra sum he is prepared to pay is called Fancy Value.
Accommodation Value : Small strips or lands cannot be developed independently due to their restricted lengths, depths etc and number of purchasers for this property is less. These strips could be sold only to the adjacent land owners who may be offering only a low value. This is called Accommodation Value.
Replacement Value : Replacement Value is the cost of reproduction of a similar Building with similar specifications at the current Market Price on the date of Valuation. It is also called as Reproduction Value or Reinstatement Value.
Depreciation Value : It is the reduction of Value of the Property due to age, deterioration, lack of maintenance, obsolescence, decay, wear and tear etc., Depreciation Value depends upon the age and its future life.
Present Value : It is replacement value less depreciation value.
The other Values are Liquidation Value, Intrinsic Value, Investment Value, Cost Value, Warranted Value, True Value, Written Down Value, Going Concern Value, Commercial Value, Rental Value, Exchange Value, Appraisal Value, Face Value, Utility Value, Use Value, Loss Value, Tax Value, Economic Value, Sale Value, Condemnation Value, Cash Value, Future Value, Capital Value, Mortgage loan Value, Forced Sale value, etc., etc.
