Disallowance

A disallowance refers to an expense or deduction claimed by a taxpayer that is not permitted under tax laws while computing taxable income. As a result, such expenses are added back to income, increasing the overall tax liability.

Disallowances are governed by various provisions under the Income Tax Act, 1961.

How It Works

• A taxpayer claims certain expenses while computing income
• The tax authorities review whether those expenses are allowable
• If found non-compliant or not eligible, the expense is disallowed
• The disallowed amount is added back to taxable income

Common Examples of Disallowance

• Personal expenses claimed as business expenses
• Payments made without proper documentation or proof
• Cash payments exceeding prescribed limits (Section 40A(3))
• Non-deduction or late deduction of TDS (Section 40(a)(ia))
• Expenses not incurred wholly and exclusively for business purposes

Why It Matters

• Directly increases taxable income and tax liability
• Common trigger during scrutiny and assessments
• Requires proper documentation and compliance
• Impacts financial reporting and profit calculations

Important Note

Even genuine business expenses can be disallowed if compliance requirements (like TDS deduction or payment modes) are not followed. Proper record-keeping is critical.