ORDER

Per Ch. G. Krishnamurthy, President - These two appeals by the Revenue arising out of the common order of the Commissioner of Income-tax (A)-X, New Delhi for the assessment years 1980-81 and 1981-82 involving identical grounds of appeal are being disposed of by a common order.

2. The common grounds of appeal for both the years read as under:—

"On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in reducing the assessed income to Nil by holding :—

(i) that the assessee company is not having a ‘permanent establishment’ in India and was, therefore, exempt under the provisions of Agreement for avoidance of double taxation between India and Japan, and

(ii) that the assessee company is not liable to tax. under section 9(1) of the Income- tax Act because it is not having any business connection in India."

3. The assessee is a foreign non-resident company. It is one of the largest trading houses of Japan and its headquarters are in Tokyo and branches are all over the world. Four branches of the company were also opened in India from 1954 onwards. These are at Calcutta, New Delhi, Madras and Bombay. It also has representative offices at Bangalore, Goa, Paradeep Port etc. The accounting period of the assessee is the financial year. For the assessment year 1980-81 the assessee company filed its return declaring loss of Rs. 3,97,014 during the current year and total loss of Rs. 01,81,61,084 after adjusting brought forward losses. Similarly for the assessment year 1981-82 it declared loss of Rs. 1,42,71,880 during the year and total loss of Rs. 3,24,32,864 after adjusting the brought forward losses. In the profit and loss account for the assessment year 1980-81, the assessee claimed expenses of Rs. 1,28,88,944 relating to the Indian Branches without showing any receipt on the receipts side. Similar is the manner for declaring loss for the assessment year 1981-82. An agreement for avoidance of double taxation between India and Japan was entered into on the 5th day of January, 1960.

4. Article III(1) of the Agreement provided that the Industrial or commercial profits (excluding the profits derived from the operation of ships or aircraft of an enterprise of one of the Contracting States) shall not be subjected to tax in the other Contracting State unless. the enterprise has a permanent establishment situated in that other Contracting State. If it has such permanent establishment, the profits attributable thereto may be subjected to tax in that other Contracting State.

5. Sub-article (2) of Articles III provided that where an enterprise of one of the Contracting States has a permanent establishment situated in the other Contracting State, there shall be attributed to such permanent establishment the industrial or commercial profits which it might be expected to derive in that other Contracting State, if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing on an independent basis with the enterprise of which it is a permanent establishment.

6. Sub-article (3) further states that in determining the industrial or commercial profits of a 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.

7. Sub-article (4) provides that in a case where the ascertainment of the correct amount of the industrial or commercial profits of a permanent establishment presents difficulties, such profits may be reasonably estimated with reference to the extent to which the activities of such permanent establishment have contributed to earning of profits.

8. Sub-article (5) is to the effect that no profits shall be attributed to a permanent establishment of an enterprise of one of the Contracting States situated in the other Contracting State through or from operations which are confined me