To elaborate a little more.
Allowances are payable irrespective if the amount paid is actually used for the specific purpose it is meant for. Under normal circumstances, they are fully taxable.
However, the Income Tax Act says that some allowances are partially or totally non-taxable, depending upon the attendant circumstances - for instance, House Rent Allowance, Conveyance Allowance, Leave Travel Allowance - see the ITA for full details on how these can be deemed partially or totally non-taxable.
On the other hand, reimbursements are payments made when a specific payment is incurred and allowed as a taxfree payment subject to certain limits. For instance, reimbursement of medical expenses subject to laid down limits.
The taxability of either an Allowance or a Reimbursement depends upon the Income Tax Law then in force. So you have to do some research to know the exact taxability of any payment made.
I hope this has cleared matters.
18th October 2007 From India, Mumbai