India's largest real estate company DLF will have to pay additional tax of Rs 300-400 crore to the government for the financial year 2005-06, after the Income-Tax (I-T) department in a special investigation found that the realty companys books showed an income lower by Rs 1,200 crore for the given year. DLF was issued a directive in this regard on Wednesday.

The real estate developer plans to challenge the governments order. We have 90 days to file the appeal, said DLF CFO Ramesh Sanka. In a filing to the National Stock Exchange (NSE) on Thursday, DLF said: The company has got an expert opinion on the enhanced taxable income and is confident that this addition will not be sustained by the appellate authorities. It is estimated that the I-T department order may result in a contingent liability of Rs 300-400 crore.

DLF shares fell 0.43% to 244.9 on the Bombay Stock Exchange, as the benchmark Sensex rose 1.37% on Thursday. The government order has come at a time, when the company is dealing with a deep slump in the realty sector and a sharp decline in its income. The additional tax outgo will put further pressure on the companys cashflow.

The I-T department in December had ordered a special audit to evaluate the tax filings of the company for FY06. The special audit report recommended that the tax department reassess approximately Rs 1,200 crore as additional income, as per DLFs filing to NSE on Thursday.

Following the report and assessment proceedings, the assessment office has issued an assessment order adding substantially most of the amount suggested by the special audit report, said the company.

In FY06, accounting norms for construction and real estate development companies changed. This was the first year when all real estate development companies, including DLF, compulsorily started using percentage of completion method (PoCM) for recognising revenues, and consequently, profits. PoCM means recognition of revenue as the construction progresses.

Under this method, most companies, including DLF, start recognising revenues on their books after 30% of the project cost (land plus construction cost) is incurred. Besides, the revenues are recognised only for the equivalent portion of the project, which has been sold to the customers. For example, if the project is half complete, but has been sold only 20%, then the revenue will be recognised only to the extent of 20% and rest will be inventory.

Before PoCM became compulsory, real estate companies used to follow completed contract method, whereby revenue was recognised only after the entire project was completed.