What is the section 21(s) rule on sales received in cash over Rs. 200,000?

What does the law say?

Section 20 of the Income Tax Ordinance, 2001 allows a business to deduct expenditure incurred for the business. Section 21 lists deductions that are not allowed. Clause (s), inserted by the Finance Act, 2025, adds a new item to that list:

fifty percent of the expenditure claimed in respect of sale where the taxpayer received payment exceeding two hundred thousand rupees otherwise than through a banking channel or digital means against a single invoice containing one or more than one transactions of supply of goods or provisions of services.

Four elements have to be present:

1. There is a sale, of goods or services.
2. The seller received payment for it.
3. The payment received exceeds Rs. 200,000, measured against a single invoice. One invoice can cover several transactions.
4. The payment was received otherwise than through a banking channel or digital means, which in practice means cash.

When all four are met, fifty percent of the expenditure claimed in respect of that sale is not deductible.

How does it work in practice?

Most section 21 clauses look at how a business spends. Clause (s) looks at how it collects. A furniture maker who sells a bedroom set for Rs. 350,000 and takes the full amount in cash has met the conditions for that invoice.

The consequence falls on the expense side of the accounts. The sale is still income as usual. What changes is that half of the costs claimed in respect of that sale are added back, so taxable profit goes up.

The clause is tied to the invoice. It does not look at a customer’s total purchases over the year. It looks at the payment received against each single invoice.

What the clause does not spell out

The Ordinance does not explain how to measure “the expenditure claimed in respect of sale”. For a trader, the cost of the goods sold on that invoice is the most direct link, but section 21(s) does not say whether overheads such as rent, wages and electricity are also to be apportioned to the sale, or by what method.

The clause also does not say how a partly cash, partly bank payment is treated. If Rs. 250,000 of a Rs. 400,000 invoice is paid in cash and the rest by bank transfer, the text asks whether the payment received otherwise than through a banking channel exceeds Rs. 200,000. It does not state a rule for mixed receipts beyond that. These gaps are left open here rather than filled in.

Worked example (illustrative figures)

Imran sells air conditioners from a shop in Multan. In tax year 2027 he raises this invoice:

• Invoice value: Rs. 480,000 (two split units, installed)
• Paid by the customer in cash at the counter: Rs. 480,000
• Cost of the two units that Imran claims as expenditure: Rs. 400,000

Step 1: Check the conditions. One invoice, payment received Rs. 480,000, which exceeds Rs. 200,000, received in cash. Clause (s) applies.

Step 2: If the expenditure claimed in respect of this sale is taken as the Rs. 400,000 cost of the units, the disallowance is 50% x Rs. 400,000 = Rs. 200,000.

Step 3: Effect on profit from this sale.

	Without clause (s) (Rs.)	With clause (s) (Rs.)
Sale	480,000	480,000
Cost allowed	400,000	200,000
Taxable profit from the sale	80,000	280,000

The taxable profit on this one invoice rises by Rs. 200,000. If Imran also claimed a share of shop rent or wages against this sale, the amount of expenditure “in respect of” it, and so the disallowance, would be larger. Step 2 uses the narrower measure only because the Ordinance does not fix one.

Had the customer paid the whole Rs. 480,000 by bank transfer or through a digital payment, clause (s) would not apply to the invoice.

What if the customer pays in instalments?

The clause refers to “payment exceeding two hundred thousand rupees” received “against a single invoice”. It does not say whether separate cash instalments against one invoice are added together. Read literally, the test is the payment received against the invoice, but the Ordinance does not state the rule for instalments in terms.

What if I sell below Rs. 200,000 per invoice?

An invoice where the cash received does not exceed Rs. 200,000 is outside clause (s). Other clauses still apply to the expense side, such as clause 21(l) for payments to suppliers.

Common mistakes

• Thinking the whole sale is disallowed. Clause (s) disallows fifty percent of the expenditure claimed in respect of the sale, not the sale amount.
• Confusing it with clause 21(l). Clause (l) is about cash payments the business makes. Clause (s) is about cash the business receives.
• Treating it as a turnover limit. The test is per invoice, not per customer or per year.
• Assuming no records are needed for cash sales. Section 174(2) lets the Commissioner disallow or reduce any deduction that is not supported by a receipt or other evidence.

What to check in the official text

Read clause (s) at the end of section 21, together with the note that it was inserted by the Finance Act, 2025. Check whether the Board has issued any clarification on how “expenditure claimed in respect of sale” is measured, as this corpus holds no circular on the point. Read section 20 for the general rule that clause (s) cuts back.