The law in India addresses issues related to the valuation of assets for tax purposes through various statutes, rules, and regulations. The correct valuation of assets is critical for determining the tax liability of individuals and entities under laws such as the Income Tax Act, 1961, Wealth Tax Act, 1957 (now abolished), GST Act, and others. Below is a breakdown of how different laws address the valuation of assets for tax purposes: 1. Income Tax Act, 1961 The Income Tax Act, 1961 provides guidelines for the valuation of assets for calculating tax liability, especially in cases of capital gains, gift tax, and property transactions. A. Capital Gains Tax Section 48: For the purpose of calculating capital gains, the full value of consideration received or accrued from the transfer of a capital asset is considered. In cases where the transaction value is below the fair market value (FMV), the FMV is considered. Section 55A: Allows the assessing officer to refer the valuation of capital assets to a valuation officer if the FMV reported by the assessee is less than the market value or if it seems understated. B. Valuation of Immovable Property (Real Estate) Section 50C: If the stamp duty value (circle rate) of an immovable property is higher than the transaction value, the stamp duty value is considered the deemed sale consideration for calculating capital gains. This section is used to prevent the undervaluation of property in sales to evade taxes. C. Gift Tax (Section 56(2)(x)) When a person receives gifts (in the form of immovable property, shares, or securities) at a price lower than the FMV, the difference between the transaction value and the FMV is considered income and taxed under the head “Income from Other Sources.” The valuation of such assets must be done as per prescribed rules. D. Valuation of Shares and Securities The Income Tax Rules, 1962 specify methods for valuing unquoted shares and securities. The valuation can be based on net asset value (NAV), earnings potential, or other specified methods. 2. Goods and Services Tax (GST) Under the GST Act, the valuation of goods and services for tax purposes is crucial to determine the tax liability. A. Transaction Value (Section 15 of CGST Act, 2017) The value of a supply of goods or services is the transaction value, i.e., the price actually paid or payable, provided the buyer and seller are not related, and the price is the sole consideration for the supply. Inclusions: The transaction value includes taxes (other than GST), duties, incidental expenses, commissions, packing charges, etc. B. Valuation Rules If the transaction value is not determinable (e.g., in cases of related-party transactions or barter), the GST Valuation Rules apply, which include: Open Market Value: The price at which the goods or services are sold in the open market. Cost-plus Method: Where the value is determined based on the cost of goods/services plus a certain percentage of profit. 3. Wealth Tax Act, 1957 (Abolished in 2015) Although the Wealth Tax Act, 1957 has been abolished, it previously dealt with the valuation of assets for the purpose of calculating wealth tax. The principles of valuation used under the Wealth Tax Act still influence various other tax provisions. A. Valuation of Immovable Property Rule 3 of the Wealth Tax Rules prescribed the method for valuing immovable property based on capitalized value or market value as per reports from registered valuers. B. Valuation of Other Assets Assets like jewelry, shares, securities, vehicles, etc., were valued based on market prices or specific guidelines provided under the Wealth Tax Rules. 4. Transfer Pricing Regulations For international transactions or specified domestic transactions between related parties, the Income Tax Act mandates that the valuation should be at arm's length price (ALP), to prevent tax evasion through undervaluation or overvaluation. A. Methods for Determining ALP (Section 92C) The following methods are used for determining the ALP: Comparable Uncontrolled Price Method (CUP). Resale Price Method. Cost-Plus Method. Profit Split Method. Transactional Net Margin Method (TNMM). These methods ensure that the transaction is valued at a price that would have been charged between unrelated parties in the open market. 5. Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 This law deals with the undisclosed foreign assets of Indian residents and their taxation. Valuation of Foreign Assets Section 3 of the Act provides for the taxation of undisclosed foreign assets based on their fair market value (FMV). The rules specify how to determine the FMV of various types of foreign assets, including bank accounts, shares, immovable property, and intangible assets. 6. Benami Transactions (Prohibition) Act, 1988 In cases of benami properties, which are properties held in the name of someone other than the person who actually finances the property, the Income Tax Department can confiscate such properties. Valuation for tax purposes is done at the FMV or the market value of the property. 7. Valuation Under Other Laws Valuation also comes into play under other laws, including: Companies Act, 2013: Under the Companies (Registered Valuers and Valuation) Rules, 2017, a registered valuer must conduct the valuation of assets such as shares, debentures, or real estate during mergers, acquisitions, or insolvency proceedings. SARFAESI Act, 2002: For the recovery of debts, banks are required to value secured assets (like real estate) to determine the reserve price for auctions in case of default. Conclusion The valuation of assets for tax purposes is governed by various laws and regulations in India, ensuring accuracy and fairness in tax assessments. The Income Tax Act, GST Act, and other tax laws provide clear guidelines on how to determine the value of different types of assets, including real estate, shares, securities, and goods. These provisions ensure that taxpayers declare the correct value of their assets to prevent tax evasion and ensure compliance with the law.

The law in India provides several frameworks to address the **valuation of assets for tax purposes**, primarily under the **Income Tax Act, 1961**, and other statutes like the **Wealth Tax Act, 1957** (though wealth tax was abolished in 2015). Valuation of assets is important for determining the correct tax liability in cases of income tax, wealth tax (historically), and capital gains tax. Here are the key legal provisions and rules governing asset valuation: ### 1. **Income Tax Act, 1961** - **Section 50C**: This section addresses the **valuation of immovable property** (like land or buildings) in cases of capital gains. It states that if the **sale consideration** declared by the assessee is less than the **stamp duty value** of the property, the stamp duty value will be deemed to be the **full value of consideration** for calculating capital gains. This is done to curb the practice of underreporting sale prices to evade taxes. - The taxpayer can dispute this value and request the Assessing Officer (AO) to refer the valuation to a **Valuation Officer** if they believe the stamp duty value is higher than the fair market value. - **Section 56(2)(x)**: This section relates to **taxation of gifts**. If a person receives any property (immovable or movable) for inadequate consideration or as a gift, the difference between the actual consideration and the **fair market value (FMV)**, if exceeding Rs. 50,000, is taxed as **"Income from Other Sources."** For immovable property, the stamp duty value is considered for valuation purposes. - **Rule 11UA**: This rule lays down methods for valuing various types of assets (such as shares, securities, jewelry, and other movable properties) for tax purposes. For shares of unlisted companies, the **Net Asset Value (NAV)** method or the **Discounted Cash Flow (DCF)** method is used to calculate the FMV. - **Section 43CA**: This section applies to the transfer of immovable property held as **stock-in-trade** (real estate developers, for instance). If the sale consideration is less than the stamp duty value, the stamp duty value will be considered as the deemed sale consideration for calculating business profits. - **Section 17**: This section is used to determine the **value of perquisites** for employees, such as the valuation of rent-free accommodation, company cars, or stock options, for calculating **taxable salary income**. ### 2. **Capital Gains Tax** - For the purpose of **capital gains tax** on the sale of assets (such as real estate, shares, or securities), the fair market value (FMV) of the asset is often required. - **Indexed Cost of Acquisition**: For long-term capital gains, the cost of acquisition is indexed to account for inflation using **Cost Inflation Index (CII)**, which impacts the valuation of assets held over the long term. - **Fair Market Value (FMV) as on 1st April 2001**: For assets acquired before 1st April 2001, the taxpayer has the option to take the FMV as on that date as the cost of acquisition to compute capital gains. ### 3. **Wealth Tax Act, 1957 (Abolished in 2015)** - Historically, under the Wealth Tax Act, wealth tax was levied on the **net wealth** of an individual, Hindu Undivided Family (HUF), or company, and the assets had to be valued at **fair market value**. - **Rule 20** of the Wealth Tax Rules laid down specific guidelines for the valuation of different types of assets, including real estate, jewelry, shares, and securities. Even though wealth tax has been abolished, similar valuation principles are often referred to in other contexts of tax law. ### 4. **Valuation under the Goods and Services Tax (GST) Act, 2017** - Under the GST regime, **transaction value** (the price actually paid or payable) is the basis for the valuation of goods and services for tax purposes. - In cases where the **transaction value** cannot be determined, or where there is no sale (e.g., barter or related-party transactions), valuation can be done using: - **Comparable value** of similar goods/services - **Cost of production/manufacture** - **Residual method** as prescribed by the law ### 5. **Benami Transactions (Prohibition) Act, 1988** - In cases of **benami transactions** (where assets are held in the name of someone other than the person who paid for it), authorities can investigate and **value assets** to determine the actual ownership and taxation consequences. ### 6. **Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015** - For cases of **undisclosed foreign assets**, the valuation of such assets is required to determine the tax liability. This act provides for stringent penalties on the undervaluation or non-declaration of foreign assets. ### 7. **Transfer Pricing under Income Tax Act** - Transfer pricing rules govern the valuation of assets or services transferred between **related parties** (like subsidiaries and parent companies) to ensure that they are **valued at arm’s length** for tax purposes, preventing tax evasion through undervaluation or overvaluation of assets. ### 8. **Valuation of Shares** - For the **valuation of shares** (in cases of mergers, demergers, acquisitions, or gift tax), various methodologies such as the **Net Asset Value (NAV)** method, **Price-Earnings (P/E) Ratio**, or **Discounted Cash Flow (DCF)** method are employed, depending on the nature of the shares (listed or unlisted) and the type of transaction. ### **Role of Valuation Experts** - The law requires the involvement of **registered valuers** or **valuation officers** in many cases where the valuation of assets is disputed or needs to be determined for tax purposes. They follow prescribed rules and methods for valuation. ### **Dispute Resolution** - If the taxpayer disagrees with the valuation conducted by the tax authorities (e.g., under Sections 50C or 43CA), they can approach the **Appellate Authorities** or the **Income Tax Appellate Tribunal (ITAT)** for resolution. In summary, the legal provisions for valuation of assets are built into various tax laws, ensuring that taxpayers pay the correct tax on the fair market value of their assets, while also giving recourse to dispute valuations if necessary. These laws aim to prevent undervaluation or overvaluation, which can lead to tax evasion or avoidance.

Dear client, Introduction “A value has a value, only if its value is valued” Valuation is the analytical process of determining the current or projected worth of an asset or a company. The Valuation profession is a vital institution of the market economies, it directly or indirectly affects everyone. Valuation services are required in almost all parts of our global financial system; it is needed for several markets–based transactions such as mergers, acquisitions, takeover, liquidation, issue of securities, etc. Overview of Valuation with various Laws Over time, several laws or subordinate legislation framed thereunder recognized and demanded valuation services provided by valuers. For example, under the SARFAESI Act, 2002 in case of sale of immovable assets, before effecting the sale of immovable property, the authorized officer is required to obtain a valuation of the property from an approved valuer, the latter being a person registered as a valuer under section 34AB of the Wealth Tax Act, 1957 and approved by the Board Of Directors or Board of Trustees of the secured creditors. Butt the application of the act has been discontinued since 1 April 2016. The Wealth Tax Act was abolished in the Union Budget (2016-2017) presented by union Finance Minister Arun Jaitley on 28 February 2015. The Wealth tax was replaced with an additional surcharge of 2 percent on the super-rich with a taxable income of over 1 crore annually. Similarly, the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident Outside India) Regulation, 2017 provides for the valuation of capital instruments. Further, under Schedule 6 of these regulations, the investment in a Limited Liability partnership either through capital contribution or acquisition/ transfer profit shares, cannot be less than fair price worked out as per any valuation norms which is internationally accepted /adopted as per market practice. There are other statutes such as the Banking Regulations Act, 1949; Income Tax Act, 1961 etc. that also have provisions that required valuations to be done for various purposes. Subsequently, the Ministry of Corporate Affairs (MCA) vide its notification dated October 18, 2017, introduced RV as a new profession under section 247 of the Companies Act 2013 which states that the valuation, where required, in respect of any property, stocks, shares, debentures, securities or goodwill or any other asset or net worth of a company or its liabilities, is to be valued by a person having such qualifications and experience and registered as a valuer in such manner, on such terms and conditions as may be prescribed. As stated above valuations are valued under different statutory laws such as the Income Tax Act, 1961 (IT Act), The Companies Act, 2013 (CA 2013), the Foreign Exchange Management Act, 1999 (FEMA), the Insolvency and Bankruptcy Code, 2016 (IBC) and the Securities and Exchange Board of India Act (SEBI). Each has different requirements to undertake the valuation under these statutes and also the valuation report is required from: a. Registered valuer (RV) under Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 b. Chartered Accountant (CA) or Merchant Banker (MB) under the Income Tax Act, 1961 c. Chartered Accountant (CA) or Merchant Banker (MB) or Cost Accountant (COA) under the Foreign Exchange Management Act, 1999. Requirement of Valuation under Companies Act, 2013 1. Section 62(1): Further Issue of share 2. Rule 8 of Companies ( Share Capital and Debenture) Rules, 2014: Issues of sweat equity shares 3. Rule 13 of Companies ( Share Capital and Debenture) Rules, 2014: Issues of share on a preferential basis 4. Rule 12 of Companies ( Share Capital and Debenture) Rules, 2014 :Return of allotment 5. Section 192(1): Restriction on non-cash transactions involving directors. 6. Section 230: Power to compromise or make arrangements 7. Section 232: Mergers and Amalgamations of companies 8. Section236: Purchased of minority shareholding 9. Section 281: Submission of report by the company liquidator Requirement of Valuation under Foreign Exchange Management Act, 1999 a. Fresh Issue or transfer of equity instruments of Indian Company (FDI) b. Subscription / Acquisition of equity shares of Overseas Companies (ODI) c. Swap of shares Requirement of Valuation under Income Tax Act 1961 a. Issue of share by a company other than a company in which public are substantially interested. b. Receipt of property without consideration or for consideration which is less than Fair Market Value (FMV) c. Transfer of shares other than quoted shares without consideration or for consideration which is less than FMV d. Indirect transfer of shares e. Issue of shares, transfer of intangibles etc. in Transfer pricing. What are the common overlaps of Valuation requirements under various Statutes? We see an overlap of valuation requirements under various statutes in many cases now because there is other regulatory compliance mentioned in different statutes required to be fulfilled. This is because, for many companies, the transactions listed above are not only covered in the Companies Act but provisions also get attracted, like the FEMA Act, Income Tax 1961, and SEBI guidelines. Multiple factors determine the applicability of these statutes, including nature of company, type of buyer and seller, resident status of buyer/seller, and the type of transaction. For example, a fresh issue of shares by a private limited company to an overseas shareholder triggers valuation requirements under Companies Act, FEMA and Income Tax. A Fresh issue to a domestic shareholder triggers valuation requirements under companies Act and Income Tax, and also creates additional requirements for the shareholders under Income Tax. Valuation under the Reserve Bank of India Act, 1934 triggers in two scenrios1 Issue or transfer of equity share or compulsory convertible instruments of an Indian company is taking place between a resident company, Foreign Direct Investment valuations get attracted. When an Indian company acquires or transfers, equity shares in an overseas company overseas Direct Investment Valuations get triggered. In the case of FDI valuations, the fair valuation of shares on an arm’s-length basis has to be done by an internationally accepted methodology. In the case of ODI valuations, no such methodology has been prescribed. FEMA laws disallow the purchase/sale/issue of shares to/from a non-resident entity if the transaction takes place above/below a certain price, determined by a valuer. Income tax laws also have provisions that tax a buyer or seller of shares for paying too low/too high a price. Further, while most laws allow ‘fair value’ as a basis of valuation (which usually means an income or market approach-based valuation), specific Income Tax provisions require a net-worth-based valuation, resulting in much lower values and a greater possibility of the buyer/seller being taxed. How do we deal with overlaps in Valuation requirements? a. Recognizing the need to have consistent, uniform and transparent valuation policies and harmonize the diverse practices in use in India. b. Create a single umbrella framework and valuation standards. c. Have fair values within a close range for the respective purposes as of a certain date. Some of these reports may become part of public records and it would definitely trigger tax assessments of FEMA action if there are two reports for the same valuation date, with very divergent values. d. Cover all valuation requirements correctly and in a timely manner, As the valuation date is the specific date at which the valuer estimates the value of the subject interest and concludes on his estimates of value. e. Ensure that a report prepared for tax purposes is not submitted anywhere else, and so on. This is because there are often statute-specific approaches or parameters which are included in reports, making them inappropriate for other purposes. Conclusion Given the importance of valuation across sectors and different statutes, it is time to bring the valuation profession under a single umbrella framework and valuation standards. This is essential to ensure uniformity and consistency in valuation done by valuers, thereby imparting legitimacy to the valuation profession. Further, the continuous professional development of valuers will play a key role in keeping the profession relevant and up-to-date. At the same time the valuers will have to abide by a common code of conduct that lends utmost integrity and professionalism to the profession. Should you have any queries, please feel free to contact us!