Yes they will issue a new passport for the new photo, and the passport will have a new number. Try and get the passport done under "tatkal" in which case you should get the new passport back fairly quick.
Now the only form in the application set that contains the child passport number is the "application for permanent residence" form (IMM0008egen). So you can send an updated version of this form with the changed passport no (and expiry date), and mention the reason for the change in a cover letter - thats what I have done.
The letter I received from delhi asking me to update the child photo also asked to resend copies of all passports, so I sent attested copies of the new child passport along with attested copies of our passport (even though we had sent it before).
Now the only form in the application set that contains the child passport number is the "application for permanent residence" form (IMM0008egen). So you can send an updated version of this form with the changed passport no (and expiry date), and mention the reason for the change in a cover letter - thats what I have done.
The letter I received from delhi asking me to update the child photo also asked to resend copies of all passports, so I sent attested copies of the new child passport along with attested copies of our passport (even though we had sent it before).