I know a friend of mine went to home office for one day service, when his British wife and British child was away on holiday (he had done his application himself), His visa was refused and called me after it was refused, Home Office has said that your wife is not present in the UK to grant visa (“who is present and settled in the UK”) however he was granted Discretionary leave to remain because they have a child.

The answer to this question is: ‘YES’.  The sponsor needs to present and settle in the UK at the time of the application.

R-LTRP 1.1. of the Immigration Rules Appendix FM says this:

The requirements to be met for indefinite leave to remain as a partner are that- (a) the applicant and their partner must be in the UK…