Partner retires in March 2020, but his account is settled in April 2020 by cash payment* – Is s.45(4) triggered, which is effective from AY 2021-22?

S.45(4) does not apply

► ‘Reconstitution’ is defined as where a person “ceases” to be a partner of firm – where such cessation took place before introduction of law, it is not ‘reconstitution’

► S.45(4) only shifts timing of taxation to actual receipt – basis of taxation continues to be accrual – which, in the present case, happened in March 2020

► Receipt as also its connection with reconstitution are twin requirements for satisfaction of charge, which is triggered only when both these events occur after April 2020

► Very clear provisions (along the lines of Explanations 5 to 7 to s.9(1)(i) for indirect transfer) are needed to trigger charge in respect of past non-taxable events

► Analogy of s.46(2) cannot be applied as liquidation of a company is a continuing event while the retirement / reconstitution is a snapshot event

► While receipts pre-April 2020 would go untaxed, entirety of partner’s capital account balance may come up for deduction against receipts post April 2020, which may give rise to absurd results.

S.9B does not apply

► Retirement in March 2020 could not have resulted into creation of a debt against firm – legally, a partner can never be creditor of the firm; he is creditor of other partners

► In absence of saving clause for past reconstitution, lacuna in legislation cannot justify the trigger of charge

► View of application may result in s.9B being applied even to dissolution pre 1 April 1987 (which was tax neutral) and create double whammy in absence of cost step-up to partner u/s. 49(1)(iii)(b).

Since Sec. 9B and 45(4) apply to receipts by partner from firm on or after 1.04.2020, in connection with dissolution or reconstitution of firm. Therefore, question arises as to whether these sections applies to such receipts in connection with dissolution or re-constitution which took place prior to 01.04.2020? The literal interpretation suggests that the date of receipt being critical, the date of dissolution/re-constitution is immaterial as long as the receipt is in connection with dissolution / reconstitution.

One possible counter to this interpretation is that the erstwhile section 45(4) dealt with distribution of capital asset on dissolution or otherwise of the firm and it held the field till 31.03.2020.

Section 9B of the Act delas with receipt in connection with re-constitution or dissolution while substituted section 45(4) delas with receipt in connection with re-constitution.

On the basis of this reasoning, is it possible to interpret that new provisions are applicable only when both the dissolution / reconstitution and receipt have taken place after 01.04.2021.

One more reasoning which supports this contention / interpretation is that once the dissolution / re-constitution has taken place prior to 01.04.2021, respective rights arising from such dissolution/ re-constitution crystalized on the date of such dissolution/ reconstitution. Any receipt thereafter, is only in relation to such rights which crystalised before the effective date of the new provisions.

Is this interpretation is correct in support of the dissolution deed/reconstitution deed executed prior to March, 2021 ?

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