Valuation Services as per the Income Tax Act

Valuation Services as per the Income Tax Act

Enterslice provides expert valuation under the Income Tax Act advisory service. Our valuation experts have the expertise and are well-versed in the process and the legalities associated with the valuation of an asset. Valuation is an essential process and is to be carried out for important tasks like mergers and acquisitions, analysis of the worth of a business, investment analysis, etc. India's government has developed certain rules and sets of instructions to carry out a valuation process properly. We at Enterslice understand that these processes can be very tedious, and proper advisory is required to tackle all the requisites of the valuation process. With hands-on experience in different domains, Enterslice is a one-stop solution for all your business needs.

Overview of Valuation under the Income Tax Act

Financial instruments are valued under different laws and regulations, such as the Companies Act, Foreign Exchange Management Act, etc. One such act is the Income Tax Act. Each of these acts has a diverse set of rules and necessities that must be interpreted during the valuation procedure. The Income Tax Act has made it obligatory for financial instruments to be valued at a fair value. FV, or the fair value, is the cost a commodity would retail for in the open market, assuming both the customer and the vendor are substantially equipped with knowledge about the commodity and reacting in their own favourable interests.

Key Criteria for Valuation as per the Income Tax Act

Going Concern

Through this method, our valuation experts will align with the company's going concern status, including expectations about future events and the timing of cash flows.

Independent Replication

It is important that the results from methods used by a valuation specialist can be self-sufficiently replicated or estimated using the same underlying data and norms. While estimating, proprietary practices and models shouldn’t be the main method of determining value.

Stage of Development

The complexity of the technique selected should be suitable to the company’s stage. A simpler valuation method with few fundamental assumptions may be more appropriate for an early-stage startup with few employees than a highly multifaceted method.

Provisions for Valuation in the Income Tax Act

Section 9 (1) (I)

Under this act, the allocation of capital assets, whether direct or indirect, will be taxed if they are held by an entity that was combined or listed outside India. Under clause 3 of rule 11UB, the valuation of shares listed under section 9 (1) (I) is to be with globally acknowledged norms.

Section 50CA

In this section of the Income Tax Act, in case the assignment of shares of unquoted companies is lower in contrast with the fair market value of these shares, then the fair value must be considered to be the whole value of contemplation in keeping with section 48 of the Income Tax Act.

Section 56 (2) (7b)

Under this section, if a company does not have a considerable interest in the public issue of shares and obtains consideration for the same from resident persons, and the deliberation received is in excess of the FMV, then the company that issues these shares will be taxed.

Section 56 (2) (10)

Section 56 (2) (10) of the Income Tax Act states that in case a person obtains any securities or shares from a person minus any consideration or consideration that is lower than the FMV, then the transferee will be taxed on the variance between the actual consideration and the FMV.

Valuation Services as per the Income Tax Act

Valuation of Business Interests

Business valuation comprises the provisions of either valuation estimation or valuation consulting services for the valuation of collective business interests or business initiatives. Such analyses are performed for the following reasons- Transaction planning, general business purpose, purchase or sale of a business, litigation dispute resolution, etc.

Fair Value Studies

A wide range of valuation-based services are included in fair value type reports, which are typically given in response to obligations arising from contracts, laws, regulations, or statutory requirements or from requirements that arise during the acquisition, sale, or transfer of assets or interests. Among these services are Valuation analysis related to bylaws, articles of organization, or other shareholder agreements, value estimates needed for contractual agreements, valuation studies for tax planning or reduction, etc. In general, the valuation services we offer in relation to fair value studies and fairness assessments are predicated on legal or statutory requirements and may entail special or unconventional valuation techniques.

Tangible Asset Valuation

Tangible asset valuation is the assessment of a company's physical belongings to determine economic worth. Tangible assets can comprise working capital, land, buildings, and real property like machinery and equipment. Our valuation experts will do a proper tangible asset valuation, help boost your negotiation power with tax assessors, and skew purchase price allocation (PPA) results during an M&A.

Fund Portfolio Valuation

Many venture capital, private equity, or hedge funds require an independent valuation of portfolio investments for financial reporting purposes. Our valuation advisors will calculate the fair value of investments in obligation with IFRS, US GAAP, the Income Tax Act, etc. Our advisors will also analyze and report on the reasonableness of the management's internal fair value estimate.

Fairness Opinion

A report discussing the purchase or sale of assets or company interests is usually given to a board of directors in order to obtain a fair opinion. The fairness view is typically taken into consideration by the board of directors when making decisions about whether to move forward with or finish a transaction. Additionally, it is assumed that the fairness opinion would need to be accessible to other parties or that publically accessible publications or filings could require a reference to the fairness opinion report.

Fair Market Value: Meaning and Methods to Calculate

Fair Market value (FMV) is the value a product would sell for on the open market, assuming both purchasers and retailer are level-headedly well-informed about the asset, are acting in their own best interest, are free of undue burden, and are given a practical time period for completing the transaction. Given these circumstances, an asset’s fair market value should characterize an accurate valuation or calculation of its worth. In India, the CBDT ( Central Board of Direct Taxes) has issued the ultimate rules for the computation of the fair market value (FMV) of assets (tangible or intangible) and the income attributable to assets situated in India for the resolution of taxation of secondary transfer of assets under section 9 (1) (i) of the Income Tax Act, 1961. The concluding rules also deal with connected reporting necessities and necessary paper preservation requirements in relation to the same. The final rules will be in effect from the date of their publication in the Official Gazette. The income attributable to the indirect transfer of assets shall be determined on the basis of the below-mentioned formula- A = B/C, where A = Income from indirect transfer of assets, B = FMV of the Indian assets on the specified date, and C = FMV of all the assets of the company on the specified date.

Computation of FMV of Movable Assets

For the purpose of section 56 in the Income Tax Act, the fair market value of a property, not including the immovable property, shall be derived in the following manner, namely-

Valuation of Jewellery

• The fair market value is the price that the jewellery would have sold for on the open market at the valuation date.
• If the jewellery is purchased on the valuation date by a registered dealer, then the invoice of the fair market value will be the price of the jewellery.
• If any other mode of transportation purchases the jewellery and the value is greater than $50,000, the assessor may receive a report from the registered valuer of the price the jewellery would have paid if it had been sold on the open market.

Valuation of Art/ Antiques

• The fair market value is the price that the work of art would have fetched if it had been sold on the open market.
• If the work of art is purchased by a registered dealer on the date of valuation, then the invoice value for the work of art will be considered fair market value.
• If any other mode of payment is used for the purchase of the work of art, then the assessed assessor may receive the report of a registered valuer to estimate the price the work would have fetched had it been sold on the day of valuation.
• If a work of art is received by another mode of payment and the value is higher than Rs. 50,000, then the assessment assessor may receive a report from a registered valuer.

Valuation of Shares and Securities

• If the cited shares and securities are procured by way of transaction carried out through any familiar stock exchange, the fair market value of such shares and securities shall be transaction value as logged in such stock exchange.
• If such quoted shares and securities are gained by way of transactions carried out and not through any recognized stock exchange, then the fair market value of those shares and securities shall be calculated in the following way-
• The least cost of those shares and securities quoted on any well-known stock exchange on the valuation date, and the least possible cost of such shares and securities on any well-known stock exchange on a date immediately preceding the valuation date and the valuation date when mentioned shares and securities were traded on such stock exchange if, on the valuation date, there is no trading in these shares and securities on any well-known stock exchange.
• The FMV of unquoted equity shares = (A+B+C+D-L) x (PV)/ (PE), where A is the book value of all the assets in the balance sheet, B is the price that the jewels and artistic necessary paper would bring if sold in the open market on the basis of the valuation analysis report obtained from a registered valuer, C is the true value of shares and securities as determined in the manner provided, D is the value adopted as processed by any official of the government for the working of payment of stamp duty with respect to intangible or immovable property. L is the book value of all the liabilities shown in the balance sheet.
• PV= the paid-up value of such equity shares, and PE= Total amount of paid-up equity share capital as shown in the balance sheet.

Section 43 of the Income Tax Act

Section 43 of the Income Tax Act of 1961 deals with the technique of accounting for certain definite assets and liabilities for the resolution of computing taxable revenue. The section specifies the rules for valuing certain assets and liabilities, comprising stock-in-trade, work-in-progress, and other possessions that are used in the construction or manufacture of goods. The section also covers the valuation of certain obligations, such as unpaid expenditures, provisions of bad arrears, and other provisions made for depending liabilities.

Assets and Liabilities Covered in Section 43

Section 43 covers a wide range of resources and obligations that are used in the production or manufacture of goods. Some of the key assets and liabilities enclosed under this section include- Stock in trade, which refers to the inventory of goods that a business grips for sale or for use in production. The section also includes the cost of materials, labour, and overheads that are experienced in the process of manufacturing or constructing goods. Immovable assets used in the production process, such as machinery, equipment, and vehicles, along with patents, copyrights, trademarks, and other intellectual property that is used in the production or manufacture of goods, are also included.

Difference between an Assessing Officer, a Registered Valuer, and a Valuation Officer

Assessing Officer

The objective of the assessment officer is wider as it is not just about rating but also about doing minor determinative assessments. The duties of an assessment officer are to observe and learn as the process goes. They calculate and collect data at an individual level. The duties of the assessment officers are long-term and continuous. Through their help, a business can come to know about the future goals, and they are responsible for collecting qualitative as well as quantitative information. This information is helpful to businesses to improve their quality.

Registered Valuer

Registered valuers are also referred to as Private valuers. They are accredited by the board and are necessary papered by the Income Tax department. They work in a private capacity, and their valuation is not obligatory on the tax authorities, but the assessing officer cannot disregard such valuation unless he has consulted the departmental valuation officer for valuation. Enterslice is fully equipped to provide valuation reports with the help of a registered valuer associated with us.

Valuation Officer

Valuation officers, also known as departmental valuation officers, are acknowledged by the income tax department. When the tax establishments require the valuation of a capital asset, they may request a Valuation officer to establish the same. The tax authorities will deliberate the valuation. The stamp valuation consultants can provide the valuation that must be accepted for the sale agreement of the fixed property. However, when the taxpayer differs in the said valuation. The Assessing Officer must refer the valuation of a valuation officer as per the rules of section 55A. 

Methods to Calculate Valuation as per Income Tax Act

Comparable Company Multiple Method

In the multiple valuation methods of the comparable company, the valuation is done by comparing the metrics of comparable companies of the same industry size. The comparative company's multiple methods work on the premise that comparable companies will have comparable valuation multiples (e.g. EV / EBITDA). The valuation advisor compiles the available statistics of the companies being evaluated and calculates their valuation multiples. This method starts with creating a peer group involving similar businesses.

PWERM Approach

The probability-weighted present value of several future outcomes is used as the basis for an estimation of value in the multi-step probability-weighted anticipated return technique. In order to ascertain the range of possible future consequences for the company, such as an IPO, sale, dissolution, or ongoing operation until a later exit date, the valuation advisor first collaborates with the management. Subsequently, the anticipated future equity value for each scenario is assigned to each share class.

Option Pricing Method

The option Pricing Method treats each class of shares as call options on the total equity value of the company, with workout prices based on the liquidation proclivity of the preferred stock. Under this method, common shares would have material value only to the extent that resident equity value remains after satisfaction of the preferred stock's liquidation preferences at the time of the liquidity date. The OPM typically uses the Black-Scholes Option Pricing Method to price the various call options.

Replacement Cost Method

Definition

The phrase "replacement cost method" describes how much money a company must now pay to replace a necessary asset—such as a lien, real estate, investment security, or other item—with a new one of equal or greater worth.

Utilization

Replacement costs are a common method used by insurance companies to assess an insured item's worth. Accountants who use depreciation to deduct the cost of an asset over its useful life also routinely employ replacement costs.

Net Present Value (NPV)

As a part of the procedure of establishing what asset is in need of replacement and what the worth of the asset is, companies use a procedure called net present value to make a conclusion about an expensive asset purchase.

Replacement Valuation

Accountants who use depreciation to deduct the cost of an asset over its useful life also routinely employ replacement costs. The practice of computing a replacement cost is known as 'Replacement valuation'.

Milestone Analysis Method

Definition

The Milestone Analysis Method is a new income recognition technique. It is designed to recognize research and development circumstances where you get paid only if a milestone event happens. 

Process

In this method, a company identifies all of those payments as revenue as soon as they complete the related milestone, but only if the situation meets some conditions.

Aspects

The consideration being paid should only relate to past performance, and the contemplation has to be practical in relation to the deliverables.

Valuation

The valuation of a company is done through this method after a company has achieved a milestone and has relatively increased or decreased its revenue.

Advantages of Hiring Enterslice’s Valuation Experts

Strong business proprietors pour a lot of blood, sweat, and tears into their businesses. They work hard to make a living for themselves and their employees, but they often don’t have a sense of the bigger market picture. There are many convincing reasons to hire a specialized valuation advisor. If you know the worth of your assets, you can identify the businesses’ least selling price needed to make a profit. A professional valuation of your business resources can help identify how much insurance coverage you need and set reinvestment objectives. Professional valuation advisors will help you create a current benchmark for your company’s value. Thus, when you get another valuation in the future, you can see how your company has grown and performed. Other Advantages include-

• A professional valuation advisor will break down the value of your business, giving you the knowledge you need to negotiate a higher price.
• A professional valuation can also help you make forecasts about future values.
• Both intrinsic and external factors shake the value of a company. A professional evaluator can help you comprehend the numbers and the meaning behind them.

Risks of not Hiring a Professional Valuation Service Provider

There are several risks involved with not hiring a valuation advisor, some of which are- The technique used by a business valuer for a business valuation will have a direct impact on the valuation report. At Enterslice, our valuation experts practice different and appropriate valuation techniques. If a business valuer does not have access to comparable statistics on sales data of comparable companies, then there is a high chance that the valuation they did could be wrong. An incompetent business valuer may not have appropriate knowledge of the business valuation process. A valuation advisor will help guide a business towards the correct approach to solving any problems within its features.