Paranjape & Paranjape Vs ITO (ITAT Mumbai Bench)
CPC Cannot Quietly Rectify What It Had Earlier Allowed: Partner’s Remuneration Cannot Be Disallowed U/s 154 Without Notice, Reasons or a Mistake Apparent From Record – ITAT Mumbai
The assessee, a partnership firm of Chartered Accountants, filed its return of income for AY 2019-20 claiming deduction of remuneration paid to its partners. While initially processing the return u/s 143(1), the CPC accepted the claim and allowed the partner’s remuneration.
However, the CPC subsequently passed an order u/s 154 and disallowed the remuneration. Curiously, the rectification order did not specify any intelligible reason for making the disallowance. No notice proposing the adjustment was issued to the assessee and no opportunity was given to explain why the remuneration was legally allowable.
The assessee challenged the rectification before the appellate authority. The Addl./JCIT(A), NFAC, however, dismissed the appeal and sustained the disallowance. The assessee, therefore, carried the matter before the Mumbai ITAT.
Before the Tribunal, the assessee submitted that the claim had been duly allowed when the return was originally processed u/s 143(1). It was only through a subsequent order u/s 154 that the CPC withdrew the deduction and disallowed the remuneration paid to the partners.
The assessee contended that the rectification order did not disclose the basis of the disallowance. There was no finding that the payment was excessive, that it exceeded the permissible ceiling prescribed u/s 40(b), or that the partnership deed did not authorise such payment.
It was further submitted that no show-cause notice had been issued before passing the adverse rectification order. The assessee placed before the Tribunal a screenshot from the income-tax portal showing that the rectification proceeding was merely reflected as being “under process”. There was nothing to indicate that any specific proposal for disallowance had been communicated to the firm or that an opportunity to respond had been granted.
The assessee also produced the partnership deed. The deed contained a specific clause authorising the payment of remuneration to the partners. Thus, the payment was not unsupported by the partnership instrument. In the absence of any other statutory defect being pointed out, there was no apparent basis for disallowing the expenditure.
An additional circumstance relied upon by the assessee was that the Department had accepted the same claim both in the earlier assessment years and the subsequent assessment years. The remuneration had not been disallowed in any of those years. There was, therefore, no justification for selectively disallowing it only for AY 2019-20 through the restricted machinery of section 154.
The Tribunal found considerable merit in the assessee’s submissions. On examining the CPC’s rectification order, the Tribunal noticed that it did not contain any reason for disallowing the partner’s remuneration. An assessee cannot be expected to defend an adjustment when the order itself fails to disclose why the claim has been rejected.
The Tribunal also took note of the assessee’s specific submission that no show-cause notice was issued before passing the order u/s 154. A rectification resulting in enhancement of liability or reduction of a valid deduction cannot ordinarily be made behind the assessee’s back.
The requirement of notice is particularly important because section 154 is confined to rectification of a mistake apparent from the record. It is not a substitute for assessment or reassessment, nor does it permit the authority to reopen a debatable issue by merely labelling it as a rectification.
Although the Tribunal did not enter into an elaborate discussion concerning the precise limits of section 154, the absence of reasons, absence of notice and existence of an express remuneration clause in the partnership deed clearly demonstrated that the impugned disallowance could not be sustained.
The partnership deed specifically authorised payment of remuneration to the partners. The Department did not establish that the payment was in violation of section 40(b), that the partners were not working partners, that the method of quantification was defective, or that the amount exceeded the statutory ceiling. No defect whatsoever in the relevant clause of the partnership deed was identified in the rectification order.
The Tribunal further considered it relevant that no similar disallowance had been made either in the preceding years or in the subsequent years. While the principle of res judicata does not strictly apply to income-tax proceedings, a claim consistently accepted on identical facts cannot be disturbed for one isolated year without identifying any change in facts, law or the governing partnership deed.
In these circumstances, the Tribunal held that there was no reason to disallow the remuneration paid to the partners for the year under consideration. It accordingly directed the AO to delete the disallowance and allowed all the grounds raised by the assessee.
The appeal of the assessee was therefore allowed.
Author’s Comment
Section 154 is meant to correct an obvious mistake—it cannot be used to create a new controversy. Where the remuneration is expressly authorised by the partnership deed and the claim was already accepted while processing the return u/s 143(1), its subsequent withdrawal requires, at the very least, identification of a clear mistake and compliance with the principles of natural justice.
The order is particularly useful in cases where CPC passes a cryptic rectification order without identifying the alleged defect. An adverse adjustment cannot survive merely because the computer has processed it. A speaking order and a reasonable opportunity of hearing are not optional merely because the decision originates from CPC.
In short, the CPC cannot first allow partner’s remuneration, later silently disallow it u/s 154, and leave the assessee guessing as to what mistake was supposedly rectified.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, MUMBAI
This appeal is filed by the assessee against the order of the learned Addl./JCIT (Appeals)-NFAC, Delhi, dated 25.02.2026, for the assessment year 2019-20.
2. The assessee raised the following grounds of appeal:
“1. The impugned order is void as it violates the provisions of section 143.
2. The Ld. Assessing Officer has erred in disallowing remuneration to the partner while passing order under section 143(1).
3. The Ld. Commissioner Appeal has erred in dismissing the appeal.
4. The demands for interest are erroneous and need to be set aside.”
3. Ld. Counsel for the assessee, at the outset, submitted that while processing the return u/s. 143(1) of the Act, the CPC allowed the remuneration paid to the partners. However, subsequently, an order u/s. 154 of the Act was passed disallowing the remuneration paid to the partners and no reason was specified for such disallowance. Ld. Counsel further submitted that no show cause notice was issued to the assessee before passing the order u/s. 154 of the Act.
4. Ld. Counsel further referring to page 36 of the paper book submitted that this is a copy of the screenshot wherein it was mentioned that the rectification order was under process and no show cause notice was issued. Ld. Counsel further referring to page 44 of the paper book, which is a copy of partnership deed submitted that the partnership deed specifically provides for remuneration to the partners and, therefore, there is no reason to disallow the remuneration paid to the partners. Ld. Counsel also submitted that neither in the earlier years nor in the subsequent assessment years such disallowance was made and, therefore, there is no justification in making the disallowance for the assessment year under consideration.
5. Heard rival contentions and perused the orders of the authorities below. We find considerable merit in the submission of Ld. Counsel for the assessee. On perusal of the order passed by the CPC u/s. 154 of the Act, we could not find any reason for the disallowance. It is also the submission of Ld. Counsel for the assessee that no show cause notice was issued prior to passing of the order u/s. 154 of the Act. Further, the partnership deed clearly specified the clause providing for payment of remuneration to the partners. Hence, we see no reason for disallowance of the remuneration paid to the partners for the assessment year under consideration, especially when there was no such disallowance made either in the earlier years or in the subsequent assessment years. Thus, we direct the Assessing Officer to delete the disallowance. Grounds raised by the assessee are allowed.
6. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 11/09/2026.
