The company understated its income for 2005-06.

DLF, the countrys biggest real estate developer, said the Income Tax

(I-T) Department, had raised an additional demand of Rs 300-400 crore for understating its income for the fiscal year ended March 31, 2006.

The tax demand comes at a time when DLF's profit has shrunk by 41 per cent to Rs 4,629 crore for the fiscal year ended March 2009.

The demand for payment of additional taxes was raised by the department on May 6, 2009, after conducting a special audit, the New Delhi-based company said in a statement to the Bombay Stock Exchange.

The I-T department had provided to the company a report from the Special Auditor commissioned by the department in December 2008 to evaluate the tax fillings for the company for FY05-06.

The special report had recommended that the tax department (re)assess approximately Rs 1,200 crore as additional income, the company said in the statement.

The discrepancy arose as the company had used the percentage of completion method (PoCM) for recognising its revenues and profits for the fiscal year ended 2006, prior to which all accounts were prepared in accordance with conveyancing method. The Institute of Chartered Accountants of India had prescribed the PoCM accounting standards for all construction and real estate companies from FY06. The PoCM recognises sales and tax only after a certain percentage, about 30 per cent of cost, is incurred. Under the conveyancing method tax is paid after the property is transferred to the buyer.

DLFs revenue in the fiscal year ended March 2006 was Rs 1,145 crore while its net profit for the period was at Rs 227.4 crore, according to the red herring prospectus filed by the company with the stock market regulator.

The companys revenue climbed to Rs 1,429.50 crore in the fiscal year ended 2007 while profit nearly doubled to Rs 417.80 crore in the period, according to its filings.

DLF is expected to appeal to the appellate authorities against the assessment made by the I-T departments special audit report.

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, DLF said in the statement.

In an unlikely event if the said order is not reversed by the appellate authorities, it can result in a contingent liability of approx Rs 300 to Rs 400 crore, DLF admitted.

DLF has also issued notices to shareholders to pay up the balance amount of money (Rs 375 along with 12 per cent interest per annum) against the shares allotted at the time of its initial public offering. The company did not give details of the number of shares on which the demand for balance of payment were being raised. DLF in June 2007 raised about Rs 9,200 crore from sale of 175 million shares at a price of Rs 525 apiece.

Meanwhile, DLF today said it has bought back about 7,640,000 shares, less than 1 per cent of the company's total outstanding shares, as part of an offer launched seven months back to arrest the slide in share price.