The Hon’ble Supreme Court in the case of Mohd Laiquiddin v. Kamala Devi Misra (Dead) by L.Rs. and Ors. (2010) 2 SCC 407 placed its reliance on the decision of the Hon’ble Madras High Court in the case of S. Parvathammal (Smt. ) v. CIT [1987] 163 ITR 161 (Mad) (HC) and held that when there are only two partners constituting the partnership firm, on the death of one of them, the firm is deemed to be dissolved despite the existence of a clause which says otherwise.

Therefore, the firm would be deemed to be dissolved.

Section 45(4) of the Income-tax Act, 1961 (Act) would be attracted in the case of a reconstitution of a specified entity. Whereas section 9B of the Act would be attracted in the case of a reconstitution and dissolution of a specified entity.

Therefore, in the given case, section 9B of the Act would be attracted.

As per section 9B of the Act, the capital asset or stock-in-trade or both received by the partner from a firm on dissolution of the firm will be considered as a deemed transfer, and the firm shall be liable to tax on such transfers in accordance with the provisions of the Act.

Supplement answer by Mr Rahul Hakani Advocate on 6-10 2021

Ans :Section 45(4) doesn’t apply to dissolution of Partnership. Only Section 9(b) applies to situation of Dissolution of Partnership.
Section 9B mandates that whenever a specified person i.e a partner receives any capital asset or stock in trade or both from a specified entity i.e a firm/LLP, during the previous year, in connection with the dissolution or reconstitution of such specified entity, then it shall be deemed that the specified entity i.e. the Partnership firm have transferred such capital asset or stock in trade or both, as the case may be, to the specified person (hereinafter referred to as “deemed transfer”).
This deemed transfer would be in the year in which such capital asset or stock in trade or both are received by the specified person.
Any profits and gains arising from such deemed transfer is deemed to be the income of such specified entity of the previous year in which such capital asset or stock in trade or both were received by the specified person. Further, it is chargeable to income-tax as income of such specified entity under the head “Profits and gains of business or profession” or under the head “Capital gains”, in accordance with the provisions of this Act.
It has also been provided that the fair market value of the capital asset or stock in trade or both, on the date of its receipt by the specified person, shall be deemed to be the full value of the consideration received or accruing as a result of such deemed transfer.