A partnership firm is compulsorily dissolved:

When the business of the firm is declared illegal

The correct answer is option 2- When the business of the firm is declared illegal.

A partnership firm is compulsorily dissolved When the business of the firm is declared illegal.

Compulsory Dissolution: A firm is dissolved compulsorily in the following cases:
(a) when all the partners or all but one partner, become insolvent, rendering them incompetent to sign a contract;
(b) when the business of the firm becomes illegal; or
(c) when some event has taken place which makes it unlawful for the partners to carry on the business of the firm in partnership, e.g., when a partner who is a citizen of a country becomes an alien enemy because of the declaration of war with his country and India.