What is a Valuation?
Valuation is an opinion on the 'value' of an asset (property) at a point of time. Value is not a concept that can be easily enclosed in a universally valid definition and there is no unique measure for it.
There are however different bases of value that the person doing valuation (who are a distinct class of professionals referred to as "valuers" use). Valuation is done as on a particular date - often a date in the present when the property was appraised or at times an estimate of the value of the property on a future date and sometimes for assessing shifts in value, on a past date. It is an estimate of the value considering range of factors specific to the property it's nature, location, ownership, the relevant laws and standards of valuation etc.
When is Valuation Needed?
Valuation is needed in several situations. For example, valuation is done for estimating
- the value of a property (e.g. Annual Rateable Value (ARV) or Unit Area System (UAS) for the levy property tax by mainly municipal bodies. When the owner contests the valuation by the authority, he too may commission a valuation of the property
- taxes on the transfer of property on fair market value (e.g capital gains tax
- rental value for determining rent when rent control acts become applicable
- value of the property for reporting in financial statements (prepared in compliance to Standards issued by Accounting Standards Board of ICAI)
- value of an underlying asset for secured lending by banks and financial institutions and subsequent enhancement
- the realizable value of the assets under Insolvency and Bankruptcy Code
- debtor, on the date of commencement of insolvency
- for enabling decision on acquisition price by Real Estate Investment Trusts (REITS) taking over stressed assets of financial institutions
- pre-bid valuation as a basis for quoting the price of a second-hand machine in a sale by tender Income tax authorities may require an estimate of Investment Cost in construction especially when using rare fittings when it charges concealment of income; the property owner may contest based on own valuation
- the total wealth of person and whether it is above the level exempted from wealth tax
- appropriate price as decision assistance to an owner to whom an offer of purchase is made
- value of the property for insurance purpose whether as part of a pre-insurance survey for setting premium and special conditions/ exclusions of a non-standard property or during claims for assessing the value of loss in case of damage to an insured asset due to an insured peril
- for an out of court arrangement in a family for the partition of inherited property
- on directions of the High Court for determining mesne profit, partition etc
- value for determining the court fee payable for a case involving a property
- the value of stocks for hypothecation to banks
- the value of a property when tax authorities allege its acquisition value is beyond the known sources of income. Often tax authorities employ their in-house valuers, but the owner can contest getting a valuation done
- value in preparation for appearing as a witness in any tax or legal proceeding
- determining total value and then estimating reversion interest of lessor and/or value of the asset in hands of lessee considering the remainder period
- when companies or firms are to be acquired or sold
- when determining the exchange value of shares held by shareholders of the two entities, when two companies are amalgamated
- when determining the value of an estate of the deceased consisting of real properties, and shares in public listed companies for estimating estate/inheritance tax (when applicable)
- the net worth of a 'person' whether a company, firm or an individual after considering its assets and liabilities
- value of land for compulsory acquisition of land under any law providing for acquisition. However, this poses a particular problem as District Collector/ Magistrate are the designated authority for valuing land even though they have no professional qualification in doing so. Under earlier laws the value declared was often arbitrary. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 lays down the methodology for valuation of acquired land but the officers of the State and not an independent professional determines value. With the passage of valuation bill the people who lose land may be able to engage valuers to contest valuation by State or have its authenticity examined. The other laws relevant to land acquisition are:
Defence Estates Department (which acquires land for the army, air force, navy)
Special Economic Zones Act, 2005
The National Highways Act, 1956 - (this subsumes process for NHAI as indicated in the National Highways Authority of India Act, 1988)
The Coal Bearing Areas Acquisition and Development Act, 1957
The Petroleum and Minerals Pipelines (Acquisition of Right of User of Land) Act, 1962
The Land Ports Authority of India Act, 2010
The Metro Railways (Construction of Works) Act, 1978
The Railways Act, 1989 (and also the Indian Tramways Act, 1886)
In short, it is not possible to transact (meaning could situationally include sale, lease, rent, mortgage, pawn, amalgamate, or split etc) in assets (property) without valuation!