Partnership on death of a partner dissolves by law; heirs do not automatically become partners, though later conduct may create a firm.

Partnership is founded on contract, so a firm of two partners dissolves on the death of one partner unless a valid arrangement shows otherwise; the deceased partner's heirs do not automatically become partners under the original deed or the Partnership Act. Section 31 presupposes an existing partnership and cannot by itself create a continuing firm after dissolution. On the tax facts, the evidence did not establish partnership with the widow or guardians immediately after death, but a later partnership could be inferred once an heir attained majority. For the relevant year, the business was therefore assessable as a firm, not an association of persons.

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Issues: (i) Whether, on the death of one of two partners, the partnership stood dissolved and the heirs of the deceased partner became partners automatically under the partnership deed and the Partnership Act. (ii) Whether, for the relevant assessment year, the business was assessable as a firm or as an association of persons, and whether the Tribunal was in holding that the parties could not be regarded as partners.

Issue (i): Whether, on the death of one of two partners, the partnership stood dissolved and the heirs of the deceased partner became partners automatically under the partnership deed and the Partnership Act.

Analysis: Partnership is founded on contract and not on status. Section 42 of the Partnership Act governs dissolution on the death of a partner, but a contract to the contrary cannot operate so as to create a continuing partnership where only two partners existed and one has died, because the firm then comes to an end and there is no subsisting partnership into which a third person can be introduced without fresh consent. Section 31, which permits introduction of a new partner by contract, presupposes an existing partnership. The heirs of the deceased partner therefore do not automatically become partners by force of the original contract.

Conclusion: The partnership between the two original partners dissolved on the death of one partner, and no automatic substitution of heirs occurred.

Issue (ii): Whether, for the relevant assessment year, the business was assessable as a firm or as an association of persons, and whether the Tribunal was wrong in holding that the parties could not be regarded as partners.

Analysis: The evidence did not show any partnership between the widow or guardians of the deceased partner's branch and the surviving partner for the period immediately after the death. The accounts and surrounding conduct showed that the surviving partner carried on the business, but not in partnership with the widow or guardians. However, once one heir attained majority, a partnership thereafter could be inferred, and the business was then carried on by the major heir representing his branch and the surviving partner representing his branch. For the assessment year in question, the relevant status was therefore that of a firm and not an association of persons.

Conclusion: The business was a firm for the assessment year 1950-51, and the Tribunal was wrong in law in denying partnership altogether.

Final Conclusion: The appeal failed because, although the original partnership ended on the death of one partner and no valid earlier partnership with the widow or guardians was proved, the assessee was still assessable as a firm for the relevant year and the Tribunal's contrary view was unsustainable.

Ratio Decidendi: A partnership of two persons is dissolved by the death of one partner, and a deceased partner's heirs do not become partners automatically under the original contract; any later partnership must rest on fresh consent or proved conduct.

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