Question And Answer
Subject: Applicability of Provisions of 45(4) and 9B of Income Tax Act 1961
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Date: April 2, 2022
Query asked by CA SUHAS P. BORA

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 ?

Please Guide

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The issue is debatable,

It can be argued that the transaction of retirement of a partner and the corresponding book entries were completed before commencement of the new Law. Hence the new law is not applicable.

Disclaimer: This article is only for general information and is not intended to provide legal advice. Readers desiring legal advice should consult with an experienced professional to understand the current law and how it may apply to the facts of their case. Neither the author nor and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this article nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of
One comment on “Applicability of Provisions of 45(4) and 9B of Income Tax Act 1961
  1. g .y.limaye says:

    partner died in june 20. firm with two partners.on death of A , B joined with C. goodwill is calculated on the date of A,HIS Share is worked as 50 lakhs and continuing B and C decided to pay this in 5 years to wife of A. the goodwill so worked on death of A and payble to wife, whether it is taxble in tha hands of firm as per new amendment from april 20.

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