Disallowance

Disallowance – Disallowance refers to an expense or payment that the Income Tax Act does not permit as a deduction while computing taxable income. These expenses are either restricted by law, exceed prescribed limits, or are not incurred wholly and exclusively for business purposes. When an expense is disallowed, it increases the taxable income of the taxpayer.

Example: If a business makes a cash payment exceeding ₹10,000 in a single day to a person for business expenditure, the excess amount is disallowed under Section 40A(3). This means that portion of the payment cannot be deducted from business income while calculating taxable income.