• Jun 06, 24
• bhushanbjain
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The basis of valuation under income tax is the fair market value of the asset on the valuation date. Fair market value is defined as the price that the asset would fetch if sold in a willing buyer-willing seller transaction on the valuation date.

The Income Tax Act and Rules provide specific methods for valuing certain types of assets, such as shares and securities, immovable property, and business assets. However, in general, the Assessing Officer has the discretion to determine the fair market value of any asset using any method that he or she considers appropriate.

Some of the factors that the Assessing Officer may consider when determining the fair market value of an asset include:

• The comparable sales method: This method compares the asset to similar assets that have been sold recently.
• The income capitalization method: This method estimates the future income that the asset is likely to generate and then capitalizes that income to arrive at a value for the asset.
• The cost approach: This method estimates the cost of replacing the asset less depreciation.

The Assessing Officer may also consider the following factors when determining the fair market value of an asset:

• The condition of the asset
• The location of the asset
• The demand for the asset
• The supply of the asset
• Any other relevant factors

If the taxpayer disagrees with the Assessing Officer’s valuation of an asset, the taxpayer may appeal the valuation to the Tax Commissioner.

Here are some examples of the basis of valuation under income tax:

• Shares and securities: The fair market value of shares and securities is determined using the closing price on the relevant stock exchange on the valuation date.
• Immovable property: The fair market value of immovable property is determined using one of the following methods:
  • The comparable sales method: This method compares the property to similar properties that have been sold recently in the same locality.
  • The residual method: This method estimates the value of the land and buildings separately and then adds them together to arrive at a value for the property.
• Business assets: The fair market value of business assets is determined using a variety of methods, depending on the type of asset. For example, the fair market value of inventory may be determined using the cost price method or the market value method.

It is important to note that the basis of valuation under income tax can change over time. For example, the Income Tax Act was recently amended to provide for a new valuation method for unlisted shares.

If you have any questions about the basis of valuation under income tax, you should consult with a qualified tax

EXAMPLES

Examples of basis of valuation with specific state in India:

• Guidance value: This is the value that is determined byincome tax the government of a state and is used for various purposes, such as stamp duty and registration charges. For example, the guidance value of land in Salem, Tamil Nadu is much higher than the guidance value of land in Jaipur, Rajasthan.
• Market value: This is the price that an asset would fetchincome tax in an open market transaction between a willing buyer and a willing seller. For example, the market value of a residential property in Delhi, Delhi may be higher than the market value of a similar property in Luck now, Uttar Pradesh.
• Cost to reproduce: This is the amount of money that would be required to construct income taxan asset from scratch. For example, the cost to reproduce a factory building may be much higher than the cost to reproduce a small shop.
• Income approach: This approach values of income tax an asset based on its ability to generate future income. For example, the income approach may be used to value a rental property based on the expected rental income that it will generate over a period of time.
• Discounted cash flow (DCF): This is a more sophisticated version of the income approach that uses discounted cash flows to value an asset. For example, the DCF method may be used to value a company based on its expected future cash flows.

Specific examples of basis of valuation in different states in India:

• Tamil Nadu: The Tamil Nadu Stamp Act, 1956,income tax specifies that the guidance value of land and buildings in the state shall be determined by the government from time to time. The guidance value is used for calculating stamp duty and registration charges on transfer of property.
• Tamil Nadu: The Tamil Nadu Stamp Act, 1959,income tax also specifies that the guidance value of land and buildings in the state shall be determined by the government from time to time. The guidance value is used for calculating stamp duty and registration charges on transfer of property.
• Karnataka: The Karnataka Stamp Act, 1957,income tax does not specifically mention the guidance value. However, the Karnataka Stamp Rules, 1977, provide for the determination of the market value of immovable property for the purpose of stamp duty and registration charges.

FAQ QUESTIONS

What is the basis of valuation of assets under income tax?

The basis of valuation of assets under income tax is the fair market value (FMV) of the asset on the valuation date. The FMV is the highest price that a willing buyer would pay and a willing seller would accept for the asset, assuming that both parties are fully informed and acting in their own best interests.

What are the different methods of valuing assets for income tax purposes?

There are a variety of methods that can be used to value assets for income tax purposes, depending on the type of asset being valued. Some of the most common methods include:

• Comparable sales method: This method involves comparing the asset to similar assets that have recently sold in the same market.
• Income approach: This method values the asset based on the income that it generates.
• Cost approach: This method values the asset based on the cost to replace it, less depreciation.

Which method of valuation should I use under income tax?

The best method of valuation to use will depend on the type of asset being valued and the specific circumstances of the valuation. It is important to consult with a qualified tax professional to determine the most appropriate method of valuation for your particular situation.

What is the valuation date under income tax?

The valuation date is the date on which the asset is valued for income tax purposes. The valuation date will vary depending on the type of asset being valued and the specific circumstances of the valuation. For example, the valuation date for a property that is being sold will be the date of sale.

What are some common mistakes to avoid when valuing assets for income tax purposes under income tax?s

Some common mistakes to avoid when valuing assets for income tax purposes include:

• Using an inappropriate valuation method: It is important to use a valuation method that is appropriate for the type of asset being valued and the specific circumstances of the valuation.
• Using inaccurate data: It is important to use accurate data when performing a valuation. This includes using data from reliable sources and using data that is specific to the asset being valued.
• Failing to adjust for depreciation: It is important to adjust the value of an asset for depreciation when performing a valuation. Depreciation is the wearing down and tear of an asset over time.

CASE LAWS

• CIT v. Ved Jain & Co. (2012): The Tribunal held that the assesses company was entitled to change its method of valuation of spares / non-moving / slow moving / obsolete parts and spares, even though it had been following a consistent method for many yeaRs.The Tribunal also held that the assesses claim in respect of valuation of such assets was based on a reasonable valuation report from an engineering valuer, and that the amount written off was not arbitrary.
• Smt. Santosh Devi v. ITO (1999): The Supreme Court held that the fair market value of an immovable property for the purpose of income tax is the price that it would fetch if sold in the open market on the valuation date, and that the stamp duty value is not necessarily the fair market value. The Court also held that the Tribunal was entitled to consider the valuation report of a registered valuer in determining the fair market value of the property.
• CIT v. Reliance Industries Ltd. (2014): The Supreme Court held that the fair market value of unquoted equity shares for the purpose of income tax is the price that they would fetch if sold in the open market on the valuation date. The Court also held that the Tribunal was entitled to consider the valuation report of a merchant banker or an accountant in determining the fair market value of the shares.
• Rajkumar v. ITO (2010): The Supreme Court held that the fair market value of a gift for the purpose of income tax is the price that it would fetch if sold in the open market on the valuation date. The Court also held that the Tribunal was entitled to consider the valuation report of a registered valuer in determining the fair market value of the gift.

STANDARD OF DEDUCTIONS

Standard deduction is a flat deduction that can be claimed by individuals from their taxable income. It is a fixed amount that is deducted regardless of the actual expenses incurred by the taxpayer. The standard deduction is available to all individuals, regardless of their income level.

In India, the standard deduction for salaried individuals and pensioners is Rs.50,000 for the financial year 2023-24. It was introduced in the Budget 2018 in lieu of the exemption of transport allowance and reimbursement of miscellaneous medical expenses.

To claim the standard deduction, the taxpayer must simply declare it on their income tax return. There is no need to provide any supporting documents.

The standard deduction is a valuable tax benefit for salaried individuals and pensioneRs.I

t can help to reduce their taxable income and lower their overall tax liability.

Here is an example of how the standard deduction works:

• A salaried individual earns a taxable income of Rs.10 lakhs in the financial year 2023-24.
• The standard deduction for salaried individuals and pensioners is Rs.50,000.
• The taxpayer claims the standard deduction on their income tax return.
• The taxable income of the taxpayer is reduced to Rs.9.5 lakhs.
• The taxpayer’s tax liability will be lower as a result.

It is important to note that the standard deduction is not available to all taxpayer RsIt is only available to individuals who are liable to pay income tax. For example, the standard deduction is not available to non-resident Indians or to individuals who have income only from sources that are exempt from income tax.

FAQ QUESTIONS

What is the standard deduction?

The standard deduction is a fixed amount of income that you can deduct from your total income before calculating your income tax. It is a way to simplify the tax filing process and reduce the burden on taxpayers who do not itemize their deductions.

Who is eligible for the standard deduction?

All taxpayers are eligible for the standard deduction, regardless of their filing status or income level. However, there are some exceptions. For example, taxpayers who itemize their deductions are not eligible for the standard deduction.

How much is the standard deduction?

The standard deduction amount varies depending on your filing status and age. For the 2023-2024 tax year, the standard deduction amounts are as follows:

• Single or Head of Household: $12,950
• Married Filing Jointly or Qualifying Widow(er): $25,900
• Married Filing Separately: $12,950
• Age 65 or older: Add $1,350 to the standard deduction amount for your filing status.
• Blind or deaf: Add $1,350 to the standard deduction amount for your filing status.

How do I claim the standard deduction?

To claim the standard deduction, simply check the box on your tax return that says “I claim the standard deduction.” You do not need to provide any documentation to support your claim.

Can I take the standard deduction and itemize my deductions in the same year?

No, you cannot take the standard deduction and itemize your deductions in the same year. You must choose one or the other.

Which is better: the standard deduction or itemizing my deductions?

Whether it is better to take the standard deduction or itemize your deductions depends on your individual circumstances. If you have a lot of deductible expenses, such as medical expenses or charitable contributions, it may be better to itemize your deductions. However, if you do not have many deductible expenses, the standard deduction may be a better option for you.

Here are some additional FAQ questions about the standard deduction:

• Can I take the standard deduction if I am a nonresident alien?

Yes, non-resident aliens can take the standard deduction. However, they are subject to different rules and restrictions than resident aliens.

• Can I take the standard deduction if I am married filing separately and my spouse itemizes their deductions?

Yes, you can take the standard deduction even if your spouse itemizes their deductions.

• Can I take the standard deduction if I am self-employed?

Yes, self-employed taxpayers can take the standard deduction. However, they must also deduct their self-employment taxes from their total income before calculating their standard deduction.

• Can I take the standard deduction if I have income from multiple sources?

Yes, you can take the standard deduction even if you have income from multiple sources. However, you can only take the standard deduction once, regardless of how many sources of income you have.

CASE LAWS

• CIT v. National Thermal Power Corporation (2007): The Delhi High Court held that the standard deduction is available to all salaried taxpayers, irrespective of whether they have incurred any actual expenses. The court also held that the standard deduction is not a reimbursement of expenses, but a fixed deduction that is allowed to all salaried taxpayers in recognition of the expenses that they typically incur.
• ACIT v. Zubi Kochar (2007): The Delhi High Court held that the standard deduction is available to all salaried taxpayers, even if they have not claimed any other deductions. The court also held that the standard deduction is not subject to any proof or verification, and that the taxpayer is not required to disclose any details of their expenses in order to claim the deduction.
• MTNL v. ACIT (2006): The Delhi High Court held that the standard deduction is available to all salaried taxpayers, irrespective of their income level. The court also held that the standard deduction cannot be denied to a taxpayer simply because they have not incurred any actual expenses.

In addition to these case laws, the Central Board of Direct Taxes (CBDT) has issued a number of circulars and clarifications on the standard deduction. These circulars and clarifications have confirmed that the standard deduction is available to all salaried taxpayers, irrespective of their income level or whether they have incurred any actual expenses.

 

ENTERTAINMENT ALLOWANCE

Entertainment allowance under income tax is a tax deduction that is available to government employees. It is intended to cover the cost of entertaining clients, customers, and other business associates.

The deduction is available under Section 16(ii) of the Income Tax Act, 1961. The amount of deduction that can be claimed is the least of the following:

• 20% of the employee’s basic salary
• Rs.5,000
• The actual entertainment allowance received by the employee in the financial year

To claim the deduction, the employee must submit a statement to their employer, detailing the amount of entertainment allowance they have claimed and the purpose for which it was spent. The employer will then deduct the amount of the allowance from the employee’s salary before calculating their tax liability.

It is important to note that the entertainment allowance deduction is only available to government employees. Employees of private companies cannot claim this deduction.

Here is an example of how the entertainment allowance deduction is calculated:

• An employee’s basic salary is Rs.100,000.
• The employee receives an entertainment allowance of Rs.6,000 in the financial year.

The employee can claim a deduction of Rs.5,000, which is the least of the following:

• 20% of the employee’s basic salary (Rs.20,000)
• Rs.5,000
• The actual entertainment allowance received (Rs.6,000)

Therefore, the employee’s taxable income will be reduced by Rs.5,000.

EXAMPLES

State: Delhi Job Title: Business Development Manager Entertainment Allowance:Rs.10,000 per month

This employee is responsible for building and maintaining relationships with clients in Delhi. They may use their entertainment allowance to pay for meals, drinks, and other expenses incurred while meeting with clients.

State:Tamil NaduJob Title: Sales Representative Entertainment Allowance:Rs.5,000 per month

This employee works in the sales department of a company in Tamil Nadu. They use their entertainment allowance to pay for expenses incurred while meeting with potential customers, such as coffee and snacks.

State: Karnataka Job Title: Marketing Manager Entertainment Allowance:Rs.15,000 per month

This employee is responsible for developing and implementing marketing campaigns for a company in Karnataka. They use their entertainment allowance to pay for expenses incurred while attending industry events, networking with other professionals, and promoting the company’s products or services.

State:Tamil NaduJob Title: Public Relations Officer Entertainment Allowance:Rs.7,500 per month

This employee is responsible for managing the company’s public image and relationships with the media. They use their entertainment allowance to pay for expenses incurred while hosting press conferences, attending media events, and building relationships with journalists.

State: Tamil NaduJob Title: Account Executive Entertainment Allowance:Rs.6,000 per month

This employee is responsible for managing client relationships and ensuring that clients are satisfied with the company’s products or services. They use their entertainment allowance to pay for expenses incurred while meeting with clients, such as meals and drinks.