According to the section 48 of Partnership Act 1932, in case of dissolution of a firm, loss including the deficiencies of capital will be recovered first:

Out of profit

The correct answer is option 2- Out of profit.

According to the section 48 of Partnership Act 1932, in case of dissolution of a firm, loss including the deficiencies of capital will be recovered first out of profit.

When a firm is dissolved, its business operations come to an end, and it must settle all its accounts and liabilities. Section 48 of the Partnership Act 1932 provides the following rules, which, subject to any agreement among the partners, apply in this context:
Losses, including deficiencies of capital, shall be addressed in the following order:
(i) Firstly, losses will be covered using any available profits of the firm.
(ii) If profits are insufficient, the losses will be covered from the capital contributions made by the partners.
(iii) If there are still remaining losses, the partners will individually contribute to cover the losses in proportion to their profit-sharing ratio.