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Kevalchand Nemchand Mehta Vs. Commissioner of Income-tax (Central), Bombay - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 61 of 1962
Judge
Reported in[1968]67ITR804(Bom)
ActsIncome Tax Act, 1922 - Sections 12(2) and 16(3)
AppellantKevalchand Nemchand Mehta
RespondentCommissioner of Income-tax (Central), Bombay
Appellant AdvocateB.A. Palkhivala, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
direct taxation - deduction - sections 12 (2) and 16 (3) of income tax act, 1922 - assessee was partner in 'a and company' and have personal account in company - assessee withdrawal certain amount on personal account from 'a and company' and subsequently deposited same in 'a limited' - whether assessee entitled for deduction of interest paid by him to 'a and company' on amount withdrawn by him - assessed showed in his return the interest received from deposit in 'a limited' - amount in 'a limited' was deposited for purpose of earning an income from such deposit - motive was to provide an income for his son - necessary condition for grant of allowance contemplated in section 12 (2) fulfilled - held, assessee entitled for deduction. - section 31(4) (since repealed) :[tarun chatterjee &.....kotval, c.j.1. the real question that falls to be determined in this case is whether the assessee is entitled to claim a deduction in respect of an amount of rs. 26,197 being the interest charged by the firm, kapurchand & co, of which he was a partner and debited in his account with the firm. we shall presently show how the question actually referred does not reflect the real controversy between the parties. 2. the assessee, kevalchand nemchand mehta, is a partner of the firm of messrs. kapurchand & co. he, in his individual capacity, had a income from house properties, dividends and interest. he also had a personal account with the firm, kapurchand & co., in which his income from the firm used to be credited and his withdrawals for personal and other expenses used to be debited. the.....
Judgment:

Kotval, C.J.

1. The real question that falls to be determined in this case is whether the assessee is entitled to claim a deduction in respect of an amount of Rs. 26,197 being the interest charged by the firm, Kapurchand & Co, of which he was a partner and debited in his account with the firm. We shall presently show how the question actually referred does not reflect the real controversy between the parties.

2. The assessee, Kevalchand Nemchand Mehta, is a partner of the firm of Messrs. Kapurchand & Co. He, in his individual capacity, had a income from house properties, dividends and interest. He also had a personal account with the firm, Kapurchand & Co., in which his income from the firm used to be credited and his withdrawals for personal and other expenses used to be debited. The Samvat year 2012 of this account commenced with a credit balance of Rs. 2,07,119-6-10. Then he made several withdrawals including payments for his own personal expenses. We are not concerned with these items of personal expenses, but on 16th December, 1955, he withdrew from this account a sum of Rs. 3,75,000. This amount was taken from the firm Kapurchand & Co, and deposited with Messrs. Kapurchand Ltd.,. forthwith on the same day in the name of his minor son, Narendra, to whom he admittedly gifted the amount.

3. As a result of the withdrawal of this amount and the other transactions entered into in Samvat year 2012, his account with the firm was overdrawn to the extent of Rs. 53,305 at the end of the year. On his borrowings from the firm an amount of 9,004-14-0 was charged to him on account of interest by the firm and this is found debited to his account on 2nd November, 1956, practically at the end of the account year.

4. In the next year, Samvat year 2013, there were items of withdrawal and deposit and the sum total of the transactions in that year resulted in the debit balance being increased. It stood at Rs. 2,72,207 at the end of that year and the interest charged for the amounts thus borrowed from the firm for the year was Rs. 18,630. This amount is found debited to his account on 22nd October, 1957. In Samvat year 2014, he also withdrew large sum of money for payment of his income-tax dues and making a private advance and the closing balance was a larger debit balance amounting to Rs. 3,47,502. For that year he was charged a total amount of interest of Rs. 26,197, the amount in dispute before us.

5. Now we are concerned in the present case with the assessment year 1959-60, for which the previous accounting year was Samvat year 2014, and in that year the position as regards the interest paid by the assessee and earned by him was as follows. As we have said, in the year of account he paid interest of Rs. 26,197 to the firm, Kapurchand & Co. As against that, from the amount of Rs. 3,75,000, which he had deposited with Kapurchand Ltd., he earned an interest of Rs. 25,375. For the assessment year 1959-60, the assessee showed in his return this amount of interest as an amount on which he was liable to be assessed under section 16 (3) along with his other income computed at Rs. 1,71,094, but the assessee claimed that the interest which he had paid in the year of account to the firm, Kapurchand & Co., should be allowed to him as a deduction, because it was the interest charged on his account by the firm.

6. The Income-tax Officer disallowed the claim to deduction holding that it was a deduction which was not admissible, since it was not referable to any source of income of the assessee, much less to his share of income from the registered firm. In an appeal of the Appellate Assistant Commissioner, the view taken was that the amount of Rs. 3,75,000 was withdrawn from the firm not with a view to making any investment but for the purpose of being gifted to his minor son. Therefore, it could not be said that the interest paid was an expenditure incurred solely for the purpose of making or earning any income as required by the provisions of section 12 (2) of the Income-tax Act and having regard to the provisions of section 16 (3), the income which was that of the minor child must be included in the total income of the assessee. In a further appeal to the Tribunal, it confirmed the view of the Appellate Assistant Commissioner and held : 'In our opinion, in deciding this point, we have only to look to the purpose of the borrowing by the assessee at the time when the borrowings were made. That purpose was simply to make the gift to his minor child. The fact that the minor child subsequently invested the amount with another concern and earned income thereon, which interest in turn was included in the income of the assessee, is, in our opinion, too remote to be taken into consideration. We would, therefore, hold that, as the amount in question was borrowed or withdrawn for the purpose of making a gift and as the gift was actually made and the assessee ceased to be the owner of the amount in question, he was not entitled to a deduction of the interest paid by him on the borrowing of the amount against the amount of interest which was included in his total income by virtue of the provisions of section 16 (3).' It will be noticed, therefore, that the controversy between the parties gives rise clearly to two independent questions. The first question is whether the assessee is at all entitled to claim that the amount of interest paid in the year of account on the sum of Rs. 3,75,000 should be allowed to him as a deduction. The other question that arises is, if the assessee is so entitled to have that or any other amount deducted, then on what basis should the interest be computed.

7. In our opinion, these two questions truly arise for determination upon the facts and circumstances in this case. We will, therefore, substitute these two questions for the questions referred to us and answer them accordingly.

8. The main question is whether interest is at all allowable on the amount of Rs. 3,75,000 borrowed from the firm, Kapurchand & Co., by the assessee in Samvat Year 2012. In Samvat year 2014, he paid interest of Rs. 26,197 to the firm, Kapurchand & Co. Of course, the whole of this interest is not attributable to his borrowing of the amount of Rs. 3,75,000, because sub-sequently various other amounts were debited to his account, because from time to time he borrowed them for meeting his own expenses, but on what basis, therefore, interest should be computed would be properly the subject-matter of the second question which we have framed above.

9. So far as the first question is concerned, the deduction is claimed on the basis of section 12 (2). The contention on behalf of the department, however, has been that the deduction under section 12 (2) cannot be availed of by the assessee, because the income represented by the interest earned of Rs. 25,375 from Kapurchand Ltd. was not his income, but was the income of his minor child to whom he had already gifted the amount. Therefore, the assessee cannot claim deduction for any expenditure incurred against that income, because it was not his income at all. Now the provisions of section 12 (1) and (2) are as follows :

'12. (1) The tax shall be payable by an assessee under the head 'Income from other sources' in respect of income, profits and gains of every kind which may be included in his total income (if not included under any of the preceding heads)....

(2) Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains... provided that no allowance shall be made on account of....'

10. Two things appear clear from the provisions of this section. The allowance in sub-section (2) is with reference to 'such' income, profits or gains as are referred to in sub-section (1). In other words, a person who is liable for the tax is the person who is entitled to the allowance. The income referred to in the sub-section (2) by the use of the words 'such income' is the income mentioned in sub-section (1) i.e., 'Income, profits and gains of every king which may be included in his total income'. The words 'which may be being included in his total income.' are of importance. They include in the income of an assessee the income which is really the income of another person but is statutorily to be included in the assessee's income. What is thus included is indicated by the words which occur in section 16 (3) in the opening clause 'in computing the total income of any individual for the purpose of assessment there shall be included'. Prior to 1939, instead of the words 'which may be included in his total income', in section 12 (1) there were used the following words 'and from every source to which this Act applies'. The sources of income are dealt with in section 6 of the Act under heads of income chargeable to income-tax and one of the heads is 'Income from other sources', which is dealt with in section 12. The second point to note regarding the provisions of section 12 is that the deduction which is allowable under sub-section (2) is for expenditure incurred solely for the purpose of making or earning 'such income, profits or gains' and one of the points that arise for determination of the first question we have mentioned above is whether the expenditure in the resent case was for earning 'such income, profits, or gains' as are described in sub-section (1).

11. Normally, the deductions and allowances contemplated by the Act are permissible only in favour of the party who is called upon to pay the tax. It would be an anomalous position if one party were called upon to pay the tax and another party becomes entitled to the deductions, or as is the case here, that the assessee, the father, must be statutorily required to pay the tax on as a deduction, because it is in fact expenditure incurred to earn the minor's income. The plain reading of section 12 (2) does not give rise to any such result. The expression used therein is '..... expenditure...... incurred solely for the purpose of making or earning such income'. By 'such income' is meant income referred to in sub-section (1) i.e., 'income... of every kind which maybe included in his total income.' In the present case, that would include the expenditure incurred in the shape of interest paid by the assessee to Kapurchand & Co. for it would be expenditure incurred solely for the purpose of earning the interest from Kapurchand Ltd. Which is income which is included in the assessee's total income. A consideration of the provisions of section 48, which gives a right to claim refunds, also shows that the Act only grants the right to claim the refund or deduction or allowance to the party who is liable to pay the tax. The refund is granted to a person only if he satisfies the Income-tax Officer that the amount of tax paid by him or on his behalf or treated as paid on his behalf for any year exceeds the amount with which he is properly chargeable under the Act for that year.

12. Mr. Joshi, on behalf of the department, has, however, sought to support the view taken by the Tribunal, viz., that the assessee, not being the owner of the amount of Rs. 3,75,000 after he transferred it to his son in the books of Kapurchand Ltd., could not say that the interest received in respect of that amount was his own property and 'as the assessee ceased to be the owner of the amount in question, he was not entitled to a deduction of the interest paid.....' In support of this view, Mr. Joshi relied upon the provisions of section 16 (3).

13. Since the amount was transferred by the assessee to his son, it will be the provisions of sub-clause (iv) of clause (a) of section 16 (3) that will apply and that provisions runs as follows :

'16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included -

(a) so much of the income of a wife or minor child of such individual as arises directly or indirectly -...

(iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration.'

14. There is no doubt that the amount gifted was not transferred for adequate consideration and it was transferred directly to the minor child of the assessee. Therefore, so much of the income of the minor child as would arise from the amount of Rs. 3,75,000 transferred to him would, under the provisions of the parent clause, be liable to be included in computing the total income of the assessee for the purpose of assessment. Mr. Joshi urged that upon the clear terms of section 16 (3), notwithstanding that the interest income would be included in computing the total income of the assessee, still in fact and in essence it was the income of the minor child and being the income of the minor child and being the income of the minor child, it cannot be the income of the assessee. Although for purposes of assessment it is included in the computation of his total income for the purpose of claiming an allowance or deduction, it is the minor's income. In this respect, he relied upon the two decisions, one of a Division Bench of this Court in D. R. Dhanwate v. Commissioner of Income-tax, and the other in Akula Venkatasubbaiah v. Commissioner of Income-tax. In the former case, a Division Bench of this court (to which my learned brother was a party) was considering the question whether the assessee in that case had failed to make a valid return and in that context section 16 (3) (iii) was relied upon to show that he was bound to disclose in his return the income of his wife. The Division Bench repelled this contention and observed at page 262 :

'It is true that under sub-section (3) of section 16, the income of the wife and the minor child is included in the total income of the assessee at the time of computation of his total income, but on the language of sub-section (3) of section 16 it cannot be said that that is an income of the assessee as such in the strict sense though it may be chargeable to tax in his hand. Section 16 provides that in computing the total income of an individual for purpose of assessment, the income of the wife or minor child of such individual as arises directly or indirectly from the membership of the wife and from admission of the minor to the benefits of the partnership is to be therein included. The provision thus first recognises that the income truly is the income of the wife or the minor child of the individual. It then directs its inclusion in the total income of the individual at the stage of computation of his total income.'

15. The other case, Akula Venkatasubbaiah v. Commissioner of Income-tax, merely followed the decision of the Division Bench (see page 464).

16. In both these case, the courts were considering the position as it emerged upon the provisions of section 16 (3), prior to the income of the wife or minor child being included in the income of the assessee. They were not concerned with the position which emerges after its inclusion; much less were they considering what would be the position upon the application of section 12 (1) read with section 12 (2) which is the case here.

17. However, for the purposes of the point before us it is not necessary to consider further the scope and ambit of those decisions, for we are prepared to assume for the purposes of the point before us, that the amount of interest received on the sum of Rs. 3,75,000 in the relevant year was the income of the minor son of the assessee prior to its inclusion in the income of the assessee. Even so, it does not displace the construction we have placed above on the provisions of section 12. Section 16 (3) says that so much of the income of the minor child as arises directly or indirectly from the assets transferred to him shall be included in computing the total income of the assessee. We will, therefore, consider that in computing the total income of the assessee this amount of interest is to be included for the purpose of assessment in the assessee's total income. But after it is so included, the question arises under what head of income will it be liable to tax. Section 12 (1) refers to the residuary source or head of taxation, namely, 'Income from other sources', and it says that the tax shall be payable by an assessee under the head 'income from other sources' in respect of income, profits and gains of every kind which may be included in his total income. Now the words 'which may be included in his total income' are significant. One of such inclusions is that contemplated by the provisions of section 16 (3), for section 16 (3) says that, in computing the total income of any individual, there shall be included so much of the income of the minor child as is attributable to the assets transferred directly or indirectly to such minor child. By virtue of such inclusion, the words of section 12 (1) 'which may be included in his total income' are clearly attracted. Then sub-section (2) goes on to provide that 'such income' shall be computed after making allowance for the expenditure incurred under certain conditions. Obviously, when sub-section (2) speaks of 'such income', it refers back to the provisions to sub-section (1), namely, income which may be included in his total income. It seems to us, therefore, that the income which is included by any provision of the Income-tax Act in the income of the assessee would become a source of income in his hands taxable under the head 'income from other source'. In other words, so far as section 12 (1) is concerned, it clearly treats that income which is included in the assessee's income as his income and in this respect it seems to us that it is immaterial how section 16 (3) treats the income prior to its inclusion in the income of the assessee. Therefore, the question which Mr. Joshi has raised upon the authority of the cases, D. R. Dhanwate v. Commissioner of Income-tax and Akula Venkatasubbaiah v. Commissioner of Income-tax, will not affect the question whether it is the income of the assessee under section 12. In our opinion, it would clearly be the income of the assessee.

18. We are also unable to accept the alternative contention which Mr. Joshi has raised that this is an income of the minor child statutorily taxable in the hands of his father, the assessee, and that so regarded it is itself a new source of income and therefore it is unnecessary to consider whether if falls under any head of charge as enumerated in section 6. Section 6 of the Indian Income-tax Act opens with the words 'save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing'. The words 'save as otherwise provided by this Act' obviously do not make any exceptions to the provisions of section 6, but refer only to the exemptions granted under the Act. The meaning of the opening words of section 6, therefore, is clear that the charge of income-tax shall be only on the enumerated heads of income, profits and gains, that is to say, on the heads of income falling under one or more of the six heads mentioned in the section. We do not think, therefore, that it would be permissible to hold having regard to the provisions of this section and to the entire scheme of the Act that there can be some other source of income other than the six heads enumerated in section 6, such as income which is statutorily liable to income-tax in the hands of an assessee, nor do any of the provisions of section 12 indicate that that was the intention behind the provisions of that section. On the other hand, sub-section (1) of section 12 clearly provides for the fifth head mentioned in section 6, namely, 'income from other sources'. That being so, it is clear that whatever is the income which can be brought under the head, 'income from other sources' would itself be the income of the assessee and can no longer remain the income of a person other than the assessee though liable to tax in the hands of the assessee. We hold, therefore, that the amount of Rs. 25,375 being the interest on the amount of Rs. 3,75,000 deposited with Messrs. Kapurchand Ltd. was the income of the assessee for the purposes of section 12.

19. The next question that arises is whether, having regard to the provisions of section 12 (2), the amount of interest which he paid in that year of account to the firm, Kapurchand & Co., can be allowed to him as an expenditure. That amount, as we have said, was Rs. 26,197.04 debited to his account on 11th November, 1958. In this respect, sub-section (2) of section 12 lays down the condition that the expenditure shall have been 'incurred solely for the purpose of making or earning such income, profits or gains...' The Tribunal has held, 'In our opinion in deciding this point, we have only to look to the purpose of the borrowing by the assessee at the time when the borrowings were made. That purpose was simply to make the gift to his minor child. The fact that the minor child subsequently invested the amount with another concern and earned income thereon which interest in turn was included in the income of the assessee is, in our opinion too remote to be taken into consideration. We would, therefore, hold that the amount in question was borrowed or withdrawn for the purpose of making gift and as the gift was actually made and as the assessee ceased to be the owner of the amount in question, he was not entitled to set off the amount of interest on the borrowing of the amount against the amount of interest which was included in his total income by virtue of the amount of interest which was included in his total income by virtue of the provisions of section 16 (3).'

20. Now it seem to us that it is as true of the intention of a man as it is of the purpose for his action that it has to be judged from all the circumstances surrounding his actions and from the nature of the action itself. In this respect we find the following statement in the statement of the case itself :

'From his account with this firm he (the assessee) withdrew Rs. 3,75,000 on December 16, 1955, in S. Y. 2012.'

and later on 'The aforesaid withdrawal of Rs. 3,75,000 was deposited with Kapurchand Ltd. forthwith on December 16, 1955, in the name of Harendra, the minor son aforesaid, to whom he had gifted the money. On this deposit interest of Rs. 25,375 was credited by the company for the S. year 2014'. Therefore, the sequence of events indicating the conduct of the assessee was that on the every day that he withdrew the sum of R. 3,75,000 from the firm, Kapurchand & Co., he laid it out to earn interest with Kapurchand Limited in the name of his son. The amount was lying in his account, with a firm engaged in business. He took it out from this account which mostly represented his profits of that firm and laid it out at interest by way of deposit with Kapurchand Ltd. Surely it was not to be expected that a business man like the assessee deposited that amount without the purpose of earning something over it. In fact, from the very day of the deposit he stipulated with Kapurchand Ltd. That they would pay interest on it. The department has found that the purpose behind this action was to make a gift to his son. It seem to us that the word 'purpose' implies 'the thing intended or the object' and not the motive behind the action. The object or the thing intended by the assessee in withdrawing the amount and depositing it with Kapurchand Ltd. on the very same day with the stipulation that the amount should carry interest was to earn that interest though his motive may have been to advance the interest of his son by gifting the income thereof to the latter. In the conclusion to which it came the Tribunal failed to distinguish between the 'motive' and 'intention' in interpreting the meaning of the word 'purpose'.

21. The word 'purpose' as used in section 12 (2) came up for interpretation before a Division Bench of this court in Ormerods (India) Private Ltd. v. Commissioner of Income-tax. The Division Bench drew the same distinction and observed :

'The short argument of Mr. Joshi is that there is clearly recorded finding of fact as to what the purpose of this borrowing was and it is said that the only answer that can be given on the question before us must, therefore, be against the assessee. We are unable to acquiesce in this argument. It is indubitably true that the Tribunal has stated that the purchase of these shares by the company has served the purpose of giving facility or convenience to two interested parties. It is equally true that the Tribunal has used the word 'purpose' in recording this finding. Evidently there is here the use of an expression which has more than one meaning. 'Purpose' may, in some context, suggest object; and purpose may sometimes suggest motive for a transaction. But under section 12, we have to read the word 'purpose' in its legal sense to be gathered from the context in which it appears. We have to fined out the meaning as far as possible from the language of the section itself and without attributing to the legislature a precise appreciation of the technical appropriateness of its own. But whatever way we read the word 'purpose' it cannot certainly mean a motive for a transaction. Much less can it mean the ulterior motive or the ultimate object of purchasing the shares by the company.'

22. It seems to us that the error which the Division Bench pointed out in the finding as to the 'purpose' in that case applies with equal force in the present case. When the Tribunal used the word 'purpose' in its finding, it had in its mind the ulterior motive or ultimate object in depositing the amount and not the object or thing intended by the assessee. Much the same distinction is found drawn in article 19, at page 372, of Salmond on jurisprudence, 12th edition, where the distinction is thus put :

'Motives, though closely related and similar to intentions, differ from intentions in certain respects. First, an intention relates to the immediate objectives of an act, while a motive relates to the object or series of objects for the sake of which the act is done.'

23. The finding, therefore, which we have quoted above is not a finding of fact in the first place and, in the second place, it had regard more to the motive than for the purpose in its true sense and therein the Tribunal made a clear error of law.

24. We hold that, upon all the facts and circumstances of the present case, the assessee deposited the amount of Rs. 3,75,000 with Kapurchand Ltd. solely for the purpose of earning an income from such deposit. His motive may have been to help his son or to provide an income for his son by the purpose was to earn the income from the amount. In that view, the necessary condition for the grant of the allowance contemplated in section 12 (2) was fulfilled and the assessee would be entitled to set off the interest paid to the firm, Kapurchand & Co., against the interest earned from Kapurchand Limited.

25. Then we turn to the second question as to how that allowance is to be computed. Now the pattern of transactions in the years 2012, 2013 and 2014 show that, after the amount of Rs. 3,75,000 was withdrawn on 16th December, 1955 (S. Y. 2012), various other amounts were withdrawn by the assessee for his personal expenses and similarly various amounts received by him as his personal income appear to have been credited in the account books of the firm, Kapurchand & Co. The balance such as it is at the end of the year 2012 of Rs. 53,304-9-5 was carried forward to S. Y. 2013. That balance was derived after deducting the amount of interest charged to him for the year 2012 amounting to Rs. 9,005. Similarly, in S. Y. 2013 there are further amounts debited to his account and large amounts also credited by the debit balance increased to Rs. 2,72,207, in which was included the interest charged of that year of Rs. 18,613. We are really concerned in the present case with the assessment year 1959-60, which is equivalent to S. Y. 2014, but we have mentioned these transactions of S. Ys. 2012 and 2013 because, in ascertaining the interest paid to the firm, Kapurchand & Co., in the year 2014, the amounts of interest paid in S. Ys. 2012 and 2013 are reflected because the total balance is carried over to the year 2014. In S. Y. 2014 the assessee paid Rs. 26,197 as interest, whereas he has earned from Kapurchand Ltd. Rs. 25,375 as interest.

26. Now, in order that we should give effect to the provisions of section 12 (2), the assessee can only be allowed the interest which represents the expenditure incurred solely for the purpose of making or earning such income, profits or gains. Therefore, the assessee can only claim in S. Y. 2014 an allowance for that amount of interest which he paid to the firm, Kapurchand & Co., as is truly attributable to and only to the borrowing of the amount of Rs. 3,75,000. We do not even know what was the rate of interest which he was called upon to pay and, curiously enough, counsel for neither party was able to enlighten us on this obvious fact, which ought to have been investigated by now. We can, therefore, only say that the department must now allow the assessee by way of expenditure incurred within the meaning of section 12 (2) that amount of interest in the year 2014, which is attributable to the amount of Rs. 3,75,000 borrowed originally on 16th December, 1955. That amount of course can never exceeded the overall interest paid of Rs. 26,197.04. After that amount earned by way of interest Rs. 25,375.

27. The first question, therefore, is answered in the affirmative.

28. On the second question, the answer is that the assessee will be entitled to be allowed that part of the total interest paid during S. Y. 2014 out of the amount of Rs. 26,197, which is attributable to interest on the outstanding amount of the original borrowing which went to make up the sum of Rs. 3,75,000. The Commissioner shall pay the assessee half the costs. There shall be no order on the notice of motion.


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