DLF hit with tax demand

Written by Corporate Bureau | New Delhi | Updated: May 8 2009, 07:08am hrs
The countrys largest real estate firm, DLF, may have to pay Rs 400 crore in additional tax following a special audit of its books for the assessment year 2005-06 by the income-tax department.

The claim stems from a switch by DLF since AY2005-06 from tax calculation based on the percentage of completion method (PoCM) from the earlier conveyancing method, according to norms prescribed by Institute of Chartered Accountants of India (ICAI) for construction and real estate companies.

DLF said it was confident that the appellate authorities would strike down the additional tax demand. Company CFO Ramesh Sanka told FE, We are going to approach the highest authority on this issue, even if that means going to the Supreme Court.

DLF last week posted a 93% decline in fourth-quarter profit at Rs 159.04 crore. For the full year, its profit stood at Rs 4,629 crore, down 41% year on year.

In the tax case, the crux of the issue lies in recognition of income. The PoCM method allows real estate companies to defer recognition of income. Under this new method, accrual of income based on the percentage of work completed in a fiscal year forms the basis for estimating tax liability.

It is a more scientific method, said PricewaterhouseCoopers executive director Shyamal Mukherjee. However, in the earlier conveyancing method, revenue generated is recognised only when the property is registered in the name of a buyer and is taxable at that time.

Commenting on the issue a tax expert, who did not wish to be identified, said, Most infrastructure and real estate companies now use the PoCM for accounting. Appreciation of revenues in this system is a common enough phenomenon and often leads to an additional tax burden at a later date.

According to a filing with the BSE on Thursday, DLF said the tax department had acted on the findings of the special audit conducted last December, which recommended that around Rs 1,200 crore be reassessed as additional income and brought under the tax net.

In its assessment order on May 6, the tax department had added substantially most of the amount suggested by the special audit report, DLF stated.

A special audit is conducted by the tax department for accounts found inaccurate under Section 142 (2A) of the Income-Tax Act.

According to government sources, the company is believed to have given lower revenue estimations and, hence, under-reported its tax liabilities.

Meanwhile, on Thursday DLF also said it had completed its buyback of shares, which started last October 17. Announcing the closure of its buyback offer, the company said it purchased 76,38,567 shares at a cost of Rs 140.69 crore, averaging Rs 184.19 per share. This is 32.9% below the companys closing price of Rs 244.9 on the BSE on Thursday.

Pursuant to buyback, the company has bought back less than 1% of the total number of outstanding equity shares, DLF said in statement. The company also said overseas investors purchased over ten times more shares during the same period. The shares purchased by promoters during the buyback period accounts for just 12.79% of the maximum size of the offer proposed by DLF.