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

What does the law say?

Two clauses of section 21 of the Income Tax Ordinance, 2001 turn on how a business pays, not on what it pays for.

Section 21(l): payments under one account head. No deduction is allowed for expenditure paid or payable under a single account head which, in aggregate, exceeds Rs. 250,000, if it was made other than by a crossed cheque, crossed bank draft, crossed pay order or other crossed banking instrument showing transfer from the business bank account of the taxpayer. The first proviso treats two more methods as the banking channel: an online transfer from the payer’s business account to the payee’s business account, and payment by credit card, provided both are verifiable from the bank statements of the payer and the payee.

The clause does not apply to:

• expenditures not exceeding Rs. 25,000;
• utility bills;
• freight charges;
• travel fare;
• postage; and
• payment of taxes, duties, fees, fines or any other statutory obligation.

Section 21(m): salary. No deduction is allowed for salary exceeding Rs. 32,000 per month to an individual paid other than by a crossed cheque, direct transfer of funds to the employee’s bank account, or digital means.

How does it work in practice?

The account head matters. Section 21(l) looks at payments “under a single account head” in aggregate. If a bakery in Rawalpindi books all flour purchases under “Flour purchases” and pays the mill Rs. 60,000 in cash every week, the aggregate under that head passes Rs. 250,000 within the year. Many small payments can together cross the line.

Whose bank account. The protected methods all refer to the business bank account. The text does not describe payments from the owner’s personal account or from a relative’s account.

What the clause does not spell out. The text says the expenditure “which, in aggregate, exceeds” Rs. 250,000 is not deductible. It does not say whether only the cash portion, or only the part above Rs. 250,000, is caught when an account head has a mix of bank and cash payments. It also does not define whether the Rs. 25,000 exclusion is measured per payment or per head. The Ordinance is silent on these points, and this page does not resolve them.

Salary. Section 21(m) is tested per individual per month. A wage of Rs. 32,000 exactly is not “exceeding” the figure. A wage above it, paid in cash, is disallowed.

Companies. Clause 21(la) sets a separate digital-payment rule for companies, effective from a date the Board notifies. It does not apply to a sole proprietor.

Records. Section 174(2) adds a second layer: any deduction can be disallowed or reduced if there is no receipt or other evidence, without reasonable cause. A cash payment below the section 21(l) limit still needs a record.

Worked example (illustrative figures)

Nadia runs a garment stitching unit in Lahore. In tax year 2027:

Supplier payments. She buys packing material under the account head “Packing material”. Payments during the year:

Method	Amount (Rs.)
Cash to a local vendor, 12 payments of Rs. 30,000	360,000
Online transfer from business account to vendor’s business account	200,000
Total under the head	560,000

The head exceeds Rs. 250,000 in aggregate, and Rs. 360,000 of it was paid in cash. Each cash payment is above Rs. 25,000, so that exclusion does not help. The cash payments fall within clause 21(l). As noted above, the text does not say exactly how a mixed head is split, so the amount the Commissioner would add back is not settled by the Ordinance itself.

Transport. She pays a Suzuki pickup driver Rs. 400,000 in cash over the year for freight. Freight charges are excluded from clause 21(l).

Staff salaries.

Employee	Monthly wage (Rs.)	Method	Section 21(m)
Tailor A	45,000	Cash	Disallowed: above Rs. 32,000 and paid in cash
Tailor B	45,000	Bank transfer	Allowed
Helper	28,000	Cash	Not caught: below Rs. 32,000

For Tailor A: Rs. 45,000 x 12 = Rs. 540,000 of salary for the year is not deductible under clause 21(m).

What if the payment is to a supplier who only accepts cash?

The Ordinance does not make an exception for suppliers who refuse bank payment. The exclusions are the ones listed in the proviso. A payment outside them and above the limit is caught whatever the reason.

What if the salary is paid through a mobile wallet?

Clause 21(m) accepts “digital means” alongside a crossed cheque and direct bank transfer. The Ordinance does not define digital means in the clause itself.

Common mistakes

• Checking each payment against Rs. 250,000. The clause tests the aggregate under a single account head, not each payment.
• Assuming any bank transfer is enough. The text refers to the business bank account, and for online transfers, business account to business account.
• Forgetting the exclusions. Utility bills, freight, travel fare, postage and taxes are outside clause 21(l) even when paid in cash.
• Confusing the two limits. Rs. 250,000 applies to account heads under clause 21(l). Rs. 32,000 a month applies to each employee’s salary under clause 21(m).

What to check in the official text

Read clauses (l), (la) and (m) of section 21 with their provisos. The figures of Rs. 250,000 and Rs. 25,000 were substituted by the Finance Act, 2020, and the Rs. 32,000 salary figure by the Finance Act, 2023, so older guidance may quote different amounts. Check whether the Board has notified the start date for clause (la) if you later incorporate a company.