The Section That Disallows Your Own Tax as an Expense

When computing income for tax purposes, not every expense claimed by a taxpayer is allowed as a deduction. Certain expenses are specifically disallowed under the Income Tax Act, 1961, meaning they cannot reduce taxable income. This prevents misuse of deductions and ensures fairness in taxation.

The most common query taxpayers have is: “Income tax expense disallowed under which section?” The answer lies in Section 14A, which is a disallowance provision that restricts deduction of expenses incurred to earn exempt income. However, this is not the only provision—several other sections of the Act also disallow or restrict expenses depending on their nature.

This blog explores Section 14A in depth, along with related disallowances, practical examples, and compliance insights.

What Are Disallowed Expenses in Income Tax?

Disallowed expenses are costs that a taxpayer cannot claim as deductions while computing taxable income. The Income Tax Act specifies these to prevent:

• Double benefits (claiming deduction on income that is exempt).
• Claiming personal expenses under the guise of business expenses.
• Expenses incurred for illegal purposes."

This ensures only genuine, business-related, & legally compliant expenses are allowed.

Section 14A – The Key Disallowance Provision

Section 14A is a disallowance provision. It says that:

• If an expense is incurred to earn exempt income, that expense is not deductible."
• For example, if dividend income is exempt, any interest paid on a loan taken to invest in shares cannot be claimed as a deduction.

This provision ensures that taxpayers do not unfairly reduce taxable income by adjusting expenses against exempt income.

Also Read: Disallowance of Expenses Related to Exempt Income

Practical Example of Section 14A

Imagine a company borrows ₹10 lakh & pays ₹1 lakh as annual interest. The funds are used to buy shares that yield dividend income, which is exempt.

• Without Section 14A: The company may claim ₹1 lakh interest as a business expense & reduce taxable profit.
• With Section 14A: The ₹1 lakh interest is disallowed, because it relates to earning exempt dividend income.

This illustrates why the law exists—to protect revenue while keeping taxation logical.

Other Sections Disallowing Expenses

Apart from Section 14A, other provisions of the Income Tax Act disallow or restrict expenses:

1. Section 37(1) – Prohibits deduction of expenses incurred for unlawful purposes (e.g., bribes, penalties).
2. Section 40A(3) – Disallows cash payments exceeding ₹10,000 in a day (with exceptions).
3. Section 43B – Allows deduction of certain expenses only on actual payment (like PF, GST, bonus).
4. Section 40(b) – Limits remuneration/interest payable to partners.

These collectively ensure expenses claimed are genuine, transparent, &  within legal boundaries.

Link with Scientific Research Deductions

While some expenses are disallowed, the Income Tax Act allows for deductions while computing taxes for expenses relating to scientific research.

• It provides for a deduction of expenses incurred on scientific research & development activities.
• Expenditure of a capital nature on scientific research can also be deducted.
• These provisions encourage businesses to invest in innovation.

Thus, while Section 14A disallows certain expenses, the Act also promotes taxpayer-friendly deductions where it benefits the economy.

Also Read: Limit on Partner Remuneration and Interest

Importance of Disallowance Provisions

The logic behind disallowances is simple:

• Taxes should be levied on true income.
• Expenses that reduce taxable profits without a genuine link to taxable income must be disallowed.

This keeps the system fair & prevents manipulation.

Interaction with Other Tax Benefits

When understanding disallowed expenses, it’s important to note how they interact with other provisions:

• Sukanya Samriddhi Yojana income tax section – gives deductions for contributions.
• Section 86 of Income Tax Act – deals with share of income from AOPs.
• Section 10(46a) of Income Tax Act – exempts income of certain notified authorities.
• Section 15H of Income Tax Act – allows senior citizens to avoid TDS with declarations.

All these work alongside disallowance rules to balance taxpayer benefits & compliance.

Real-Life Impact on Businesses

For businesses, expense disallowances can be significant. A wrong claim can lead to:

• Higher taxable income.
• Penalties for misreporting."
• Interest on unpaid taxes.

For example, a company that records cash expenses above limits may see them disallowed, inflating its taxable profits.

Also Read: Deductions Allowed Only on Actual Payment Basis

Humanized View – Why This Matters to You

For small entrepreneurs, understanding which expenses are disallowed helps avoid costly mistakes. For instance, using personal expenses like family travel under business accounts will not only be disallowed but may also invite scrutiny.

For investors, recognizing Section 14A ensures proper planning. Instead of claiming interest on loans for exempt income, they can look for deductible investment avenues.

Conclusion

So, income tax expense disallowed under which section? The primary answer is Section 14A, which is a disallowance provision that prevents deduction of expenses linked to exempt income. Additionally, sections like 37, 40A, & 43B also restrict certain claims.

While these rules may seem strict, they maintain fairness in taxation. At the same time, the Act offers benefits such as deductions on scientific research expenses, tax-saving schemes like Sukanya Samriddhi Yojana, & reliefs under Section 86, Section 10(46a), & Section 15H.

👉 Want to know which of your expenses are allowed, which are disallowed, and how to maximize tax deductions legally? Visit Callmyca.com and let our experts guide you with smart, compliant tax planning.