The advert, which highlights the impact of palm oil on rainforests and orangutan, has gone viral.
TV presenter James Corden shared the ad on Twitter where it's had 15 million views.
Clearcast, the body which approves ads for TV, said it wasn't approved because it breached political advertising rules.
The advert, which was released on social media on Friday, didn't breach the rules because it was about the environment or palm oil.
It wasn't approved because the advert was originally made by the environmental organisation Greenpeace.
It comes down to the law - political advertising isn't allowed on TV.
In the case of the Iceland ad, Clearcast looked at the rule which says adverts breach the law if it is "inserted by or on behalf of a body whose objects are wholly or mainly of a political nature".
Clearcast said Greenpeace had to show it wasn't a "political advertiser" before the ad could be approved - but wasn't able to do that.
In a blogpost on Monday , Chris Mundy, managing director of Clearcast, said the body doesn't consider the message in the ad itself to be political.
"The case made by many of the people that have contacted us is that they feel it is wrong that the ad is considered political and that it makes important environmental points. However, for the reasons above, that is not the issue here."
So has it been banned?
Clearcast doesn't have the power to ban adverts.
It just decides whether ads meet the rules set out in law.
It's the job of the Advertising Standards Authority (ASA) and communications regulator Ofcom to ban ads that fall foul of the rules.
It's up to broadcasters - such as Channel 4 and ITV - to ensure the ads they put on their channels don't breach the law.
As Clearcast explains: "Broadcasters considered the Iceland ad as part of the clearance process and decided that it fell foul of the political advertiser rule meaning it may breach their obligations."
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