Contingent Liability:

A contingent liability is a potential obligation that may arise in the future depending on the outcome of a particular event. It is a possible liability that may or may not arise, depending on a specific set of circumstances. Contingent liabilities are not recognized in the financial statements unless the possibility of any outflow of resources embodying economic benefits is remote.

Income tax demand disputed by a company:

When a company disputes an income tax demand, it means that the company disagrees with the amount of tax assessed by the tax department. The company may dispute the demand for several reasons, such as incorrect calculation, non-applicability of tax provisions, or misinterpretation of facts.

Treatment of disputed income tax demand:

The Income Tax Act, 1961 provides for a legal procedure for appealing against an income tax demand. The company can file an appeal with the Commissioner of Income Tax (Appeals) within 30 days of receiving the demand order. If the appeal is not successful, the company can further appeal to the Income Tax Appellate Tribunal, High Court, and Supreme Court of India.

Since the outcome of the appeal is uncertain, the income tax demand disputed by the company is considered a contingent liability. The company may or may not be required to pay the tax demand, depending on the outcome of the appeal. Therefore, the income tax demand disputed by the company is classified as a contingent liability in the company's financial statements.

Conclusion:

In conclusion, income tax demand disputed by a company is a contingent liability since it is a potential obligation that may or may not arise depending on the outcome of the appeal. The company should disclose this liability in its financial statements to provide a clear picture of its financial position and risk exposure to its stakeholders.