RECENT TRENDS AND CHALLENGES IN THE FIELD OF VALUATION

1. RECENT TRENDS AND CHALLENGESIN THE FIELD OF VALUATION BY JIGESH J. MEHTA B.E. (Civil), LL.B., M.S.(USA), F.I.V. (Govt. Approved Valuer) Office : A-302, Tirupati Plaza, Near Collector’s Office, Athwa Gate, Surat - 395 001. Tel. no. : +91-261-2472637 Organised by Centre for Valuation Studies Institution of Science and Technology for Advanced Studies & Research, Vallabh Vidyanagar 14th December, 2013

2. Any challenge implies an opportunity….Infact, a prospect is associated with every problem of valuation. Every challenging situation can usually be addressed primarily by the application of ten commandments of valuation. viz. • 4 factors – legal, economic, social, physical/technical; • 4 ingredients – utility, scarcity, transferability, demand/supply; • Value means Present Worth of Future Benefits, and • In any valuation exercise of tangible assets what is valued is not the tangible thing but rights and interests arising out of ownership of tangible assets.

3. Non-availability of Approved Subdivision Plans

4. SUBPLOT no.8-A/2 paiki east part (Mudra Mark-Fin Pvt. Ltd.) N O P E N S P A C E (6M) SUBPLOT no.8-A/1+2 paiki auctioned by Dena Bank SUBPLOT no.8-A/1 paiki west part (MudraTexturisers Pvt. Ltd.)

5. Combined Construction on two adjoining plots but only one offered as loan security Two brothers had purchased two adjoining plots. Instead of constructing duplex-type bungalow with two independent units, they had constructed only one(1) two-storeyed building covering both plots in such a way that the ground floor was occupied by one brother and 1st floor was occupied by another brother. The brother occupying ground floor wanted loan facility against mortgage of his one plot. On inspection, it was found that 1st owner’s ground floor was on his plot but the 1st floor portion above it was under the possession of 2nd brother. We could not inspect 1st floor occupied by 2nd brother as relations between two brothers had strained and they were not on talking terms. After the loan officer was informed about his fact, the bank decided to reject this property as security.

6. Areas of common use such Roads, COP and loading/unloading transferred in favour of some specific plotholder(s) in a layout

8. Amalgamation PlanS

9. Share of Undivided Land Area Not Transferred alongwith built-up units

10. Basements approved for Household Storage Existing area (including excess area than that shown in plan) and change of use from household store to commercial use are regularized by payment of impact fees. The moot question is whether the sale / transfer of basement (approved as household store) to someone other than shareholder/member of the society be considered void ab-initio in view of the decision in the case of Nahalchand vs. Panchali Society ? There are two school of thoughts proposing different approach to this kind of problem: (i) that opine that it is case of clear title irrespective of whether the corresponding undivided land area is transferred or not, while (ii) that consider it is a case of defective title because FSI of basement is exempted and the land area ought to have been conveyed fully to the members on the upper floors.

11. Unauthorised Construction that can be Regularised

12. Valuation for flat on Hire-Purchase Agreement for Capital Gains Tax Flats in a residential colony of Gujarat Housing Board were allotted on Hire Purchase basis in the year allotted in 1970 with a monthly instalment of Rs.86 payable till September-1990. If any flatholder intended to sell his flat prior to September 1990, he would have to pay all outstanding dues / instalments to the Gujarat Housing Board or handover the possession back to Gujarat Housing Board. The entire scheme was purchased by a developer in the year 2012-13 and we are required to give valuation report as on 1-04-1981 for capital gains tax purpose. Market Value as on 1-04-1981 (if all instalments cleared) = 388 sq. ft. @ Rs.80 per sq. ft. = Rs.31,040 Present Value as on 1-04-1981 (considering outstanding instalments payable) = Rs.31040 - outstanding liability as on 1st April 1981 = Rs.31040 - present value of outstanding liability of 114 monthly instalments of Rs.86 payable till September 1990 = Rs.31040 - (Monthly Instalment x Month’s Purchase) = Rs.31040 - Rs.86 x {1 - [1/(1+R/m)m.n]} where n = 9.5 years, R = 8%, (R/m) m = 12 instalments per year = Rs.31040 - (Rs.86 x 79.20) = Rs.31040 - Rs.6813 = Rs.24,227 As per the amendment made in the provisions of Capital Gains Tax, the above value of the property is to be enhanced by 8.52 times to give effect of Cost Index for the Assessment Year 2013-14 (i.e. Financial Year 2012-13). Hence, Indexed Cost of Acquisition as on date of sale = Rs.24,227 x 852 = Rs.2,06,414 100

13. Bombay Stamp Duty Act-1958

14. Prospects under Capital Gains Tax SECTION 50 C of the Income Tax Act Bombay Stamp Duty Act-1958, Section 31(Adjudication as to Proper Stamps) • Section 50 C(2) of I.T. Act – Reference to Valuation Officer • Section 16A(4) of W.T. Act - Valuation Officer to serve a notice • Section 16A(5) of W.T. Act - Valuation Officer to consider objections and evidences • Valuer’s Role • To prepare reasoned submission supported by accepted principles of valuation and court judgements mainly on the following two aspects : • Sale Instances relied upon must be comparable • Rented properties must be valued by rent capitalisation method • Bharat Bijlee Ltd. vs. State of Maharashtra, 2003

15. Prospects under Wealth Tax Act Exemptions are covered under Section 2(ea) and Section 5 (A) Any house that the assessee may occupy for the purpose of business or profession carried on by him. (B) Any residential property that has been let out for a minimum period of three hundred days in the previous year. (C) Any property in the nature of commercial establishments or complexes. (D) Urban Land such as land on which construction of a building is not permissible under any law for the time being in force or the land occupied by any building constructed with the approval of the appropriate authorityor any unused landheld by assessee for industrial purposesfor a period of two yearsfrom the date of acquisition by him. According SECTION 5(VI), one house or part of a house or a plot of land (not exceeding 500 sq. m.) belonging to an individual or H.U.F. is exempted. Concessional valuation for a house can be worked out by applying provisions of Schedule-III of Wealth Tax Act.

16. OTHER AVENUES IN VALUATION • In addition to the routine valuations for banks, taxation, stamp-duty and visa purpose, the following avenues may be explored by valuers. • 1. Asset Listing Verification & Valuation for Municipal Corporation Assets (MODEL NATIONAL MUNICIPAL ASSET VALUATION METHODOLOGY MANUAL published by Ministry of Urban Development, January 2009) for financial statements • 2. Valuation for Dispute Resolution – • a. Expert Witness • b. Mesne Profit • c. Arbitration/ Small Causes Court • 3. Fixation of Royalty i.e. Rent – normally in High Court • 4. Technical Due-Diligence of Project – FSI/ Approval Status, etc • 5. RE Project Feasibility reports • 6. Valuation for REITs - Recent draft SEBI Regulation • 7. Lender’s Engineer – Surveillance Report • 8. Valuation of Pre-Leased properties – Concept of Investment Value based on Investor ROI • 9. Land Acquisition Cases • 10. IFRS/ Purchase Price Allocation/ Impairment • 11. Certification for work done and balance work of the developer in order to determine the Value-Added Tax (VAT) payable by a developer to the State Government • (refer Supreme Court decision on 26-September 2013 in M/s. L & T vs. State of Karnataka which states thattheactivity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government).

17. Thank You