Section 263 of the Indian Contract Act, 1872, provides that after dissolution of partnership, the rights and obligations of the partners continue in all things necessary for winding-up the business of the partnership. In the normal course there must be a general sale and winding up followed by a distribution of the surplus. In all cases of dissolution, assets of the firms have to be realised and converted into money. No one can insist on retaining his share unsold. Liquidation of assets and realisation by sale is the normal feature of winding up. The value can be realised on the footing of an actual sale or a notional sale as is made clear by Supreme Court in various cases. In the case of notional sale specific items of properties can be allotted to one of them and the money value to the other. This distribution is only part of the adjustment of the rights between these persons. Such distribution and adjustment of rights is a necessary consequence of dissolution of the partnership and cannot in law amount to a transfer.
Distribution of surplus assets of an erstwhile partnership is only an adjustment of rights of parties and, does not involve a transfer of title from one party to the other. It is also significant to note that for such a distribution there is no consideration. Hence distribution of assets following dissolution can-not be treated as “conveyance”. Various High Courts in India have taken the view that the process by which distribution of surplus assets takes place between partners inter se or between a partner and representative of a deceased partner, does not involve a transfer or conveyance. Such a view has been also been approved by Supreme Court in Commissioner of Income Tax, U. P. vs. Bankey Lal Vaidya, and Commissioner of Income Tax, M. P., Nagpur and Bhandara v. Dewas Cine Corporation has approved this view.
As regards settling of accounts after dissolution, Section 48 of the Partnership Act provides as follows:
“In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed :
(a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.
(b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order : –
(i) in paying the debts of the firm to third parties;
(ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital;
(iii) in paying to each partner rateably what is due to him on account of capital; and
(iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.”
In the case death of a partner, all that the estate of the deceased partner would be entitled to, will be the proportion of the partnership assets after having been realised and converted into money and all the debts and liabilities of the partnership having been paid and discharged. This alone is the content of the right of the deceased partner. What, therefore, happens on death of a partner is that his share in the partnership is given back to him (to his legal heir) normally by well-accepted commercial methods of valuation and the value of his share is quantified in terms of money. The purpose of making the valuation is to determine the share of the deceased partner so as to be paid in terms of money, and on such payment the remaining assets of the partnership continue to belong to the surviving partner. 
Acquisition of interest in the partnership
For acquisition of interest in the partnership firm, there must be a mode by which the interest must pass. If there is no process by which a transfer of interest can be said to have taken place in respect of the interest of the deceased, what the estate of the deceased partner gets is only the money value of the interest of the deceased partner. Therefore, the High Court of Bombay in Commissioner of Income Tax, Bombay City-III vs. Patel Brothers held that in case of death of a partner where moneys are paid to the estate of the deceased partner in lieu of his share in the partnership, there is no acquisition of any interest by the surviving or continuing partner.
What happens to Subsisting Contracts?
Section 45 of the Indian Contract Act provides that- When a person has made a promise to two or more persons jointly, then, unless a contrary intention appears from the contract, the right to claim performance rests, as between him and them, with them during their joint lives, and, after the death of any of them, with the representative of such deceased person jointly with the survivor or survivors, and, after the death of the last survivor, with the representatives of all jointly.
Assignment of Prior Contracts: How this can be worked out is that the legal representative of the deceased partner while receiving what was due to the deceased partner in respect of his share, may assign his interest by a deed or he may, instead of assigning his interest, take the amount due to him from the firm and give a receipt for the money and acknowledge that he has no more claim on his surviving partner. The former type of transactions will be regarded as sale or release or assignment of his interest by a deed attracting stamp duty while the latter type of transaction would not. If the surviving partner agrees to pay a lump sum in consideration of the legal representative of the deceased partner assigning or relinquishing his share or right in the partnership and its assets in favour of the surviving partner, the transaction would amount to a transfer within the meaning of section 2(47) of the Income Tax Act. The steps for assignment of prior contracts to a new partnership firm or company formed for this purpose can be summarized as follows-
Step 1: Settlement of Accounts followed by a distribution of the surplus.
Step 2: Issue of No Objection / Release Letter from Legal Heir
As noted above, the legal representatives of the deceased partner can either- (a)assign their interest in the firm (by virtue of being legal heir) by way of an assignment deed, or (b) take the amount due to the deceased partner from the firm and give a receipt for the money and acknowledgement that they have no more claim on the surviving partner.
Step 3: Novation of Subsisting Contracts
Step 4: Termination of Contracts
The subsisting contracts may be required to be terminated in either of the two cases- (a) the other party to the contract does not agree to such assignment to this newly formed company or (b) the contract does not allow assignment. In both of these cases, the process for termination as laid down in that contract will be required to be followed.
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 Para 6
 Commissioner of Income Tax, M. P., Nagpur and Bhandara v. Dewas Cine Corporation AIR 1963 SC 676.
 Para 7
 Full Bench of the Madras High Court in Board of Revenue v. V. M. Murugesa Mudaliar, AIR 1955 Mad 641 and in the Board of Revenue v. T. M. Mandalal Nadar & Co., AIR 1968 Mad 254, the Andhra Pradesh High Court in K. R. Mallesha v. Ramnath Gajanand MANU/AP/0061/1974 , Full Bench of the Karnataka High Court in K. Azra Jabeen v. State of Karnataka, AIR 1981 Kant 17
 AIR 1971 SC 2270
 AIR 1961 SC 676
 145ITR614(Bom) para 34
 145ITR614(Bom)Para 53