According to the scenario you have mentioned,
No, the partnership firm, after the demise of one partner does not convert itself into proprietorship. You cannot continue with the business.
In Smt. S. Parvathammal v. CIT, the court held that when there are only two partners in a firm, on the death of one partner, the firm is deemed to be dissolved despite the existence of any clause which says otherwise. As per the wishes of the directions of the deceased partner, the surviving partner may enter into a new partnership with the heir of the deceased partner, but that would constitute a new partnership.
Section 42 of the Indian Partnership Act, 1932 provides for the dissolution of partnership on the occurrence of certain contingencies. The process of dissolution includes disposing of the assets, and the liabilities, are paid off. The firm discontinues all of its activities. According to Sec. 48 of The Indian Partnership Act,1932, the following procedure is to be followed for the settlement of accounts, after the dissolution of the firm:
Losses including, deficiencies of capital, shall be first paid out from the profits, next from the capital, and if necessary, by the personal contribution of partners in their profit-sharing ratio.
The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital, will be applied in the following manner:
- Payment of the debts of the firm to the third parties
- Payment of advances and loans given by the partners
- Payment of capital contributed by the partners
- The surplus, if any, will be divided in their profit-sharing ratio.
Hope it helps,
Regards,
Srishti
