This is departmental appeal. issue raised by department turns on interpretation of provision in Agreement for Avoidance of Double Taxation between India and France ('the Agreement'). assessee is non- resident company incorporated in France. company had entered into contract with Bombay Municipal Corporation for execution and erection of water filtration plant at Bhandup. accounting year followed in company is year ended 30-9-1977. For assessment year 1978-79, company claimed i n their return deduction of Rs. 43,695 by way of head office expenditure. There is no dispute on this figure. ITO felt that provisions of section 44C of Income-tax Act, 1961 ('the Act') would be applicable. This provision allows deduction to be computed on three alternative basis. statute provides for amount to be deducted which is least of three alternatives. According to ITO, one of alternatives provided is to average out expenditure in prior years and allow amount equal to it. Now, assessment year 1978-79 is first assessment for assessee in India. Therefore, there was no expenditure under head 'head office expenditure' for any of prior assessment years. Therefore, nothing is allowable as per this alternative. In result, he held that nothing is allowable at all under section 44C. 2. Commissioner (Appeals) found that provisions of Agreement are applicable in computing income of assessee. As per Agreement, expenditure to be allowed is per commercial principles. He, therefore, held that assessee is entitled to claim made in return. In alternative, he held that one of alternative computations under section 44C would entitle assessee to deduction of Rs. 18,755. He held that in alternative at least this amount is allowable. 3. Against this finding, department has come on appeal. We have heard Shri Ruhela for department and Shri Puri for assessee, we are of opinion that finding of Commissioner (Appeals) is to be upheld. There i s no dispute that assessee, being company incorporated in France, is assessable on this income in France also. There is also no dispute that since work is done in India, part of income accrues in India and is assessable in India. So since income accruing to assessee-company comes for assessment in both countries, we have to consider provisions of Agreement. Now, clause (1) of article III provides that industrial or commercial profits of enterprise of one of Contracting States shall not be subjected to tax in other Contracting State unless enterprise has permanent establishment situated in other Contracting State. proceedings have been taken on footing that assessee-company has permanent establishment in India. Now, clause (2) of article III provides that where enterprise of one of Contracting States has permanent establishment situated in other Contracting State, there shall be attributed to such permanent establishment industrial or commercial profits which it might be expected to derive in that other Contracting State, if it were independent enterprise. Now, clause (3) of article III is crucial to issue before us, This clause reads as follows: "(3) In determining industrial or commercial profits of permanent establishment, there shall be allowed as deductions all expenses, wherever incurred, reasonably allocable to such permanent establishment, including executive and general administrative expenses so allocable." As per above clause, expenses incurred, whether in France or in India, which are reasonably allocable to permanent establishment in India would be allowable. Since proceedings are on assumption that assessee- company has permanent establishment in India, then, as per this clause, expenses incurred in head office, although incurred in France, would be allowable if they are reasonably allocable. Now, there is no dispute that expenditure claimed by assessee is reasonable and allocable in determining Indian income. Now, it will be clear that but for provisions of section 44C, assessee would be entitled to what has been claimed by them. 4. ITO has assumed that provisions of section 44C override provisions of articles in Agreement. This assumption is contrary to circular issued by CBDT, i.e., Circular No. 333 [F. No. 506/42/81-FTD], dated 2-4-1982--[1982] 9 TAXMAN 264 (Sec. IV). Paragraphs 2 and 3 of circular read as follows: "2. correct legal position is that where specific provision is made in double taxation avoidance agreement, that provision will prevail over general provisions contained in Income-tax Act. In fact double taxation avoidance agreements which have been entered into by Central Government under section 90 of Income-tax Act, also provide that laws in force in either country will continue to govern assessment and taxation of income in respective country except where provisions to contrary have been made in agreement. 3. Thus, where double taxation avoidance agreement provides for particular mode of computation of income, same should be followed, irrespective of provisions in Income-tax Act. Where there is no specific provision in agreement, it is basic law, i.e., Income-tax Act, that will govern taxation of income." Now, it will be seen from above that ITO have been directed to compute income according to Agreement unless Agreement clearly provides otherwise. provisions of Agreement will override provisions of Act. 5. That being position, we have to see whether any contrary provision is found in Agreement. On going through Agreement, we do find contrary provision. Clause (3) of article III clearly provides that whatever is reasonably allocable out of expenditure incurred in both countries, should be allocated and allowed as deduction, We consider this as very specific provision in computing income of non-resident having activities in India and France. Therefore, provisions of section 44C will not be applicable. Commissioner (Appeals) is justified in his findings. 6. In view of our finding, we think it unnecessary to go into issue whether any of three alternatives of computation of amount deductible under section 44C has to be considered. In our opinion, that exercise would be completely academic. 7. In result, we dismiss departmental appeal. This Explanation by legal fiction treats business in existence in previous year for purpose of bringing balancing charge to tax even though there is cessation of operation. It is well settled principle that legal fiction is to be limited for purpose for which it has been created and cannot be extended beyond that legitimate frame. . . ." *** INCOME TAX OFFICER v. DEGREMONT INTERNATIONAL