If I pay a supplier or employee in cash above a certain amount, is that expense disallowed?

A cash payment above the limits in section 21 of the Income Tax Ordinance, 2001 loses its deduction, even if it was a genuine business cost. Two clauses do this. Clause (l) covers spending under one account head above Rs. 250,000. Clause (m) covers salary above Rs. 32,000 a month to one person.

What does the law say?

Clause (l): large payments. No deduction is allowed for any expenditure for a transaction, paid or payable under a single account head, which in aggregate exceeds Rs. 250,000, if it is made other than by:

• a crossed cheque drawn on a bank;
• a crossed bank draft or crossed pay order; or
• any other crossed banking instrument showing transfer of the amount from the business bank account of the taxpayer.

The first proviso adds two accepted methods: an online transfer from the payer’s business account to the payee’s business account, and payment by credit card. Both count as the banking channel only if the transaction can be verified from the bank statements of both payer and payee.

The second proviso lists what clause (l) does not cover:

Exception	Detail
Small expenditures	Expenditures not exceeding Rs. 25,000
Utility bills	Any amount
Freight charges	Any amount
Travel fare	Any amount
Postage	Any amount
Statutory payments	Taxes, duties, fees, fines or any other statutory obligation

Clause (m): salaries. No deduction is allowed for any salary exceeding Rs. 32,000 per month to an individual, paid other than by crossed cheque, direct transfer of funds to the employee’s bank account, or digital means.

The business bank account. Section 114A(1) requires every taxpayer to declare to the Commissioner the bank account used for business transactions. Section 114A(2) says this is done through the original or modified registration form prescribed under the Ordinance. Clause (l) refers to transfers from this account.

How does it work in practice?

Clause (l) looks at the account head, such as “Purchases: cement” or “Repairs”, and at whether the amount under it, in aggregate, is over Rs. 250,000. The clause uses both “for a transaction” and “in aggregate” in the same sentence. The Ordinance does not define further how payments are grouped for this test, so this page does not settle it.

The clause disallows the expenditure itself. It does not say that only the portion above Rs. 250,000 is disallowed.

Clause (m) is measured per individual, per month. A salary above Rs. 32,000 must go by crossed cheque, direct bank transfer or digital means. A salary at or below that figure is not caught by clause (m), though it still has to meet the section 20 test.

A separate clause (la) applies only to companies and only from a date the Board notifies. It does not apply to a sole proprietor.

Worked example (illustrative figures)

Bilal runs a small furniture workshop in Lahore. His made-up payments for tax year 2027:

Payment	Method	Amount
Timber from one supplier, single invoice	Cash	Rs. 380,000
Hardware and fittings, single invoice	Cash	Rs. 22,000
Freight for a delivery to Islamabad	Cash	Rs. 40,000
Carpenter’s salary	Cash, Rs. 45,000 a month for 12 months	Rs. 540,000
Helper’s salary	Cash, Rs. 28,000 a month for 12 months	Rs. 336,000

Step by step:

1. Timber: Rs. 380,000 is above Rs. 250,000, paid in cash, and not in any exception. Clause (l) disallows Rs. 380,000.
2. Hardware: Rs. 22,000 does not exceed Rs. 25,000, so the second proviso excludes it from clause (l).
3. Freight: excluded from clause (l) as freight charges.
4. Carpenter: Rs. 45,000 a month exceeds Rs. 32,000 and was paid in cash. Clause (m) disallows Rs. 45,000 x 12 = Rs. 540,000.
5. Helper: Rs. 28,000 a month does not exceed Rs. 32,000, so clause (m) does not apply.
6. Total disallowed under clauses (l) and (m): Rs. 380,000 + Rs. 540,000 = Rs. 920,000.

Had Bilal paid the timber by crossed cheque or online transfer from his declared business bank account, and the carpenter by bank transfer, neither clause would disallow those amounts.

What if …?

What if I pay by card? The first proviso to clause (l) treats payment through a credit card as a transaction through the banking channel, if it is verifiable from the bank statements of both sides.

What if I pay from my personal account instead of the business account? Clause (l) refers to transfer from “the business bank account of the taxpayer”, and the online-transfer proviso to the payer’s business account. A payment from an undeclared personal account is not within those words.

What if I receive large amounts in cash from customers? That is a different rule, clause (s) of section 21, covered on the page on cash sales over Rs. 200,000.

Common mistakes

• Assuming only the amount above Rs. 250,000 is lost. The clause refers to the expenditure, not the excess.
• Paying staff cash above Rs. 32,000 a month. Clause (m) removes the whole salary deduction for those months.
• Using a non-crossed cheque. Clause (l) names crossed instruments.
• Forgetting to declare the business account. Section 114A(1) requires it.

What to check in the official text

Read clauses (l), (la) and (m) of section 21 with their provisos, and section 114A. Check the account you use for business is the one declared on your registration form.