As per the judgements of the Supreme Court in CIT v. Dewas Cine Corporation [1968] 68 ITR 240 (SC) and Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 (SC), the distribution of assets by a partnership firm to its partners upon dissolution or reconstitution is a mutual adjustment of rights and not a taxable transfer.

Section 9B of the Income Tax Act, 1961 introduced by the Finance Act 2021, creates a deeming fiction where the transfer of a capital asset or stock-in-trade by a specified entity (including an LLP) to a specified person (e.g., a partner) during reconstitution or dissolution is treated as a taxable transfer. The fair market value (FMV) of the stock-in-trade on the date of transfer is deemed to be the full value of consideration, and any profits or gains are taxable in the hands of the LLP under the head “Profits and Gains of Business or Profession” or “Capital Gains,” depending on the nature of the asset

However, as in the present case, there is a transfer of stock in trade by LLP to a partner without reconstitution and dissolution, it is arguable that section 9B does not apply. The issue is not free from doubt and may involve litigation.