I would say that Grant was still in command of his district, Smith was given command of the upriver expedition, and nobody was in arrest, virtually or otherwise.
I know that our discussion here has flowed along since then, but your reply here intrigued me, so I took the time to read through some OR materials. We were talking about the period between March 4 and March 13, 1862, and Grant's comment in his memoirs (p. 327) that as of Halleck's March 4 dispatch Grant was "virtually in arrest and without a command."
I think you are right that C.F. Smith only replaced Grant in field command having to do with the upriver expedition. Reviewing some of the OR reports and correspondence from that period, it does appear that Grant was still exercising control over his district. However, considering the tenor of the OR documents by Halleck and McClellan, it's easy to see how Grant at the time might have believed that his entire position was tenuous and that he was in danger of being removed from any kind of command. He even asked to be relieved at more than one point.
As it turned out, apparently communications between Grant and Halleck were being interrupted by an enemy agent, so Halleck thought Grant was being intentionally unresponsive. At least that's what Grant says: "My dispatches were all sent to Cairo by boat, but many of those addressed to me were sent to the operator at the end of the advancing wire and he failed to forward them. This operator afterwards proved to be a rebel; he deserted his post after a short time and went south taking his dispatches with him." (p. 325)
As far as being 'virtually under arrest,' don't you think that would come down again to the tone of Halleck's and McClellan's communications? "Do not hesitate to arrest him at once if the good of the service requires it, and place C.F. Smith in command. You are at liberty to regard this as a positive order if it will smooth your way." (McClellan to Halleck, 3 March 1862) "Your going to Nashville without authority, and when your presence with your troops was of the utmost importance, was a matter of very serious complaint at Washington, so much so that I was advised to arrest you on your return." (Halleck to Grant, 6 March 1862)
All of this occurred within a period of about ten days and was resolved relatively quickly once communications resumed. But during that short period, isn't it understandable that Grant believed he was about to lose all command and even his freedom, and that he might have portrayed things that way in his personal memoirs?
I realize that you might have access to further documentation that can shed light on this point about the accuracy of Grant's memoirs.
ARB