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Commissioner of Income-tax Vs. Gopal Investors' Corporation Private Ltd. (30.03.1974 - BOMHC) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 40 of 1965
Judge
Reported in[1976]103ITR563(Bom)
ActsIncome Tax Act, 1922 - Sections 23A, 23A(1) and 56(A)
AppellantCommissioner of Income-tax
RespondentGopal Investors' Corporation Private Ltd.
Appellant AdvocateR.M. Hajarnavis, Adv.
Respondent AdvocateY.P. Trivedi, Adv.
Excerpt:
(i) direct taxation - super tax - sections 23a and 56a of income tax act, 1922 - whether levy of super tax under section 23a could be made without issue of notice under section 34 - order under section 23a not an order of assessment within meaning of section 34 (3) - such order can be made without issuing notice under section 34. (ii) super-tax - whether amount representing dividend not liable to super tax under section 56a includible in total income of assessee for purpose of determining whether it was liable to super-tax under section 23a (1) - total income of assessee of previous year is only to be reduced by three items which are specifically enumerated in clauses (a), (b) and (c) of section 23a (1) - in none of these three items dividend received by assessee is referred as specific.....kantawala, c.j. 1. this is a consolidated reference both at the instance of the assessee as well as the revenue, under section 66(1) of the indian income-tax act, 1922 (hereinafter referred to as 'the act'). the assessee is a private limited company holding shares in other companies. its total income for the assessment year 1960-61 was determined at rs. 55,975. this total income included an item of rs. 17,027 representing dividends on the new ordinary shares of the tata iron & steel co. ltd. which were exempt from payment of super-tax under section 56a of the act. even a certificate was issued by the company that the dividends on those new shares were exempt from payment of super-tax in the hands of the share-holders. the tax payable by the assessee on the total income came to rs. 25,433......
Judgment:

Kantawala, C.J.

1. This is a consolidated reference both at the instance of the assessee as well as the revenue, under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'). The assessee is a private limited company holding shares in other companies. Its total income for the assessment year 1960-61 was determined at Rs. 55,975. This total income included an item of Rs. 17,027 representing dividends on the new ordinary shares of the Tata Iron & Steel Co. Ltd. which were exempt from payment of super-tax under section 56A of the Act. Even a certificate was issued by the company that the dividends on those new shares were exempt from payment of super-tax in the hands of the share-holders. The tax payable by the assessee on the total income came to Rs. 25,433. In the relevant previous year the assessee-company distributed by way of dividends a sum of Rs. 21,000.

2. The Income-tax Officer was of the view that as the dividend declared was less than the minimum percentage fixed under section 23A(1) of the Act the provisions of the said section were applicable in the present case. Before the Income-tax Officer two alternative contentions were urged on behalf of the assessee. First, it was urged that as the dividend income of Rs. 17,027 was exempt from payment of super-tax under the provisions of section 56A that item had to be excluded from the total income of the assessee and the reduced total income, therefore, amounted to Rs. 48,948. After deducting therefrom the income-tax of Rs. 25,433 the distributable surplus came to Rs. 23,515 as against which dividend declared were Rs. 21,000. This, according to the assessee, was more than the statutorily prescribed percentage for distribution of dividends as contemplated by section 23A(1) of the Act. Secondly, it was contended in the alternative that if the amount of Rs. 17,027 was not excluded from the total income it should in any event be excluded from the distributable surplus which was liable to super-tax under section 23A(1) of the Act because according to the assessee having regard to the provisions of section 56A this was an amount on which no super-tax was leviable or payable. If this alternative contention was accepted then a petty amount of Rs. 2,515 would be subject to super-tax under section 23A(1) instead of the sum of Rs. 19,542 over which the Income-tax Officer actually levied super-tax under section 23A(1) of the Act. Both the contentions were rejected by the Income-tax Officer and super-tax as indicated above was levied under his order under section 23A of the Act. On an appeal by the assessee the same two contentions were urged by the assessee before the Appellate Assistant Commissioner. He accepted the first contention and held that the sum of Rs. 17,027 had to be excluded from the total income available for distribution of dividends under section 23A(1) of the Act and did not consider it necessary to express any opinion on the alternative contention. The revenue aggrieved by the order of the Appellate Assistant Commissioner preferred an appeal to the Tribunal. The Tribunal remanded the matter back to the Appellate Assistant Commissioner and called upon him to record his finding on the second alternative contention of the assessee. After remand even the alternative contention of the assessee was accepted by the Appellate Assistant Commissioner. Thereafter, the matter was heard by the Tribunal. Before the Tribunal a new contention was for the first time sought to be urged on behalf of the assessee in addition to the other two contentions that were urged before the Income-tax Officer and the Appellate Assistant Commissioner. As this new contention pertained to a question of law notwithstanding the objection on behalf of the revenue the Tribunal permitted the assessee to urge such a contention. This contention was, if the Income-tax Officer intends to take action under section 23A(1) of the Act for levying super-tax upon the assessee-company, it was obligatory upon him to issue a notice as contemplated by section 34. As in the present case no such notice was issued by the Income-tax Officer before initiating proceedings under section 23A(1) of the Act, the entire proceedings were jurisdiction. The other two contentions were also pressed on behalf of the assessee. The Tribunal held that section 23A of the Act created an independent charge over and above the charge which was crystallised in an assessment and provisions of section 34 had no application to the charge under section 23A which could operate by its own flat; that section 56A makes it clear that the dividends exempted under section 56A must be an integral part of the total income of the assessee-company; that in computing the amount of super-tax payable by the assessee-company under section 23A(1) of the Act the amount of Rs. 17,027 representing dividends which were exempt from super-tax under section 56A must be excluded from the distributable surplus before levying super-tax under section 23A(1). In view of this finding according to the Tribunal an amount of Rs. 2,515 became chargeable to super-tax under section 23A(1) of the Act. On these facts the questions that are referred for our determination both at the instance of the assessee and the revenue are as under :

'1. Whether, on the facts and in the circumstances of the case, the levy of super-tax under section 23A could be made without the issue of a notice under section 34

2. If the answer to the first question is in the affirmative, whither on the facts and in the circumstances of the case, the amount of Rs. 17,027 representing dividend not liable to super-tax under section 56A was includible in the total income of the company for purposes of determining whether it was liable to super-tax under section 23A(1) ?'

3. If the answer to the second question is in the affirmative, whether, even if the said amount of Rs. 17,027 was includible in the total income of the company while determining whether provisions of section 23A(1) were applicable the said amount was to be excluded from the distributable surplus which is chargeable to super-tax under section 23A ?' The first two questions are referred at the instance of the assessee while the last question in the at instance of the revenue.

4. Mr. Hajarnavis on behalf of the revenue contended that the object of section 23A of the Act is to assess certain companies to super-tax on undistributed income in the cases covered by the said sections; that if a case is covered by section 23A or any of its sub-sections, then it is a self contained code and regard is to be had to the provisions of the said section for the purpose of deciding whether the company concerned has distributed as dividends profits and gains less than the statutory percentage of the total income to be computed as therein provided and what should be the liability for payment of super-tax. He submitted that section 23A is a specific provision for payment of super-tax in respect of undistributed income by companies in which the public are not substantially interested and its provisions are express and specific and must prevail over the general provisions contained elsewhere in the Act. In short, his submission was that if proper effect was given to the language of section 23A, then the order that was passed by the Income-tax Officer ought to be restored and the questions referred ought to be answered accordingly. On the other hand, Mr. Trivedi on behalf of the assessee-company submitted that as no super-tax was payable upon the income by way of dividend as specified in the requirement of section 56A of the Act, that item had to be exempted from computation for the purpose of section 23A of the Act. His argument was that where under the scheme of the Act no tax is payable on any amount such item is not to be regarded as forming part of the income of the assessee and for his submission reliance was placed by him upon the observations of this court in Commissioner of Income-tax v. N. M. Raiji [1949] 17 ITR 180. His second submission was that in case the first submission is not accepted by this court, in any event in determining the amount of income over which super-tax is payable by the assessee company under section 23A of the Act, the dividend income which is exempt from payment of super-tax under section 56A of the Act ought to be deducted and it is on the remaining amount that the liability for payment of super-tax should be imposed. To support this contention he urged that it will not be proper to look to the provisions of section 23A in isolation. He urged that the question of levy and payment of super-tax has been discussed at more than one place in the Act and all the provisions of the Act must be borne in mind before any liability for payment of super-tax can ever arise. According to his submission section 56A was a declaratory section which provided that no super-tax shall be payable by a company in respect of income by way of dividends which complied with the conditions down in that section, and that such provisions were general and cannot be overlooked or ignored whenever a question of payment of super-tax has to be considered in any provisions of the Act including those of section 23A. He further urged that the provisions of section 23A are penal in character and when upon a proper analysis of the scheme of the Act more than one view is possible then preference has to be given to the view in favour of the assessee. Being looked at from that point of view he submitted that the alternative contention urged by him must in any event be accepted and the Tribunal was right in what it ultimately did in determining that only a sum of Rs. 2,515 became chargeable to super-tax under section 23A.

5. So far as the first question is concerned, he fairly conceded that the matter is now concluded by a decision of the Supreme Court in M. M. Parikh, Income-tax Officer v. Navanagar Transport & Industries Ltd. : [1967]63ITR663(SC) . In Navanagar Transport and Industries Ltd's case : [1967]63ITR663(SC) , the Supreme Court had occasion to consider the various provisions of the Act including those of sections 3, 4, 23, 23A, 34 and 55 of the Act and upon consideration of these various provisions it took the view that an order under section 23A of the Act made by the Income-tax Officer directing payment of additional super-tax is not an order of assessment within the meaning of section 34(3) of the Act and to such an order the period of limitation prescribed under section 34(3) does not apply. In view of this clear pronouncement of the Supreme Court the first question has to be answered in the affirmative and against the assessee.

6. That takes us to the second question which relates to inclusion of the item of Rs. 17,027 being dividend exempt from payment of super-tax under section 56A in the computation of the total income of the assessee for the purpose of section 23A(1). The expression 'total income' is defined in section 2(15). Under that definition 'total income' means total amount of income, profits and gain referred to in Sub-section (1) of section 4 computed in the manner laid down in the Act. Section 4 of the Act enumerates the item of income, profits and gains from whatever source derived which are included in computation of the total income of any previous year. The normal provisions relating to super-tax are contained in Chapter IX which comprises of sections 55 to 58. Section 55 is a charging section for levy of super-tax. Under that section, in addition to the income-tax charged for any year, there shall be charged, levied and paid for that year in respect of the total income of the previous year of any individual, Hindu undivided family, Company, etc., an additional duty of income-tax (in this Act referred to as super-tax) at the rate or rates laid down for that year by a Central Act. There are two provisos to this section but it is unnecessary to refer to them for the purpose of the present case. The operative part of section 55 makes it clear that what is described as super-tax in this Act is an additional duty of income-tax. How the total income for the purpose of super-tax is to be calculated is laid down in section 56. Under that section, except in cases to which section 15A applies or to which by clause (a) of the proviso to sub-sections (3) and (4) of section 25 those sub-sections do not apply and subject to the provisions of this Chapter, the total income of any individual, Hindu undivided family, company, etc., shall, for the purposes of super-tax, be the total income as assessed for the purposes of income-tax, and where an assessment of total income has become final and conclusive for the purposes of income-tax for any year, the assessment shall also be final and conclusive for the purposes of super-tax for the same year. Under this section, therefore, total income as assessed for the purposes of income-tax has to be regarded as the total income of the entity concerned for the purposes of super-tax. Section 57 applied to non-resident partners and shareholders and the provision thereof is omitted by section 69 of the Indian Income-tax (Amendment) Act, 1939. Section 58 makes it clear that the various provisions of the therein mentioned will be applicable to super-tax. In this Chapter IX by section 3 of the Finance Act, 1953, section 56A which provided for exemption from super-tax of certain dividends was added with effect from April 1, 1953. The material part of that section is as under :

'56A. Exemption from super-tax of certain dividends. - (1) No super-tax shall be payable by a company on such part of its total income as consists of dividends received from an Indian company formed and registered after the 31st day of March, 1952, where -

(i) the Central Government is satisfied that the Indian company is wholly or mainly engaged in an industry for the manufacture or production of any one or more of the following, namely :- ...

as specified in the First Schedule to the Industries (Development and Regulation) Act, 1951,

(ii) the income of the Indian company would have been exempt under the operation of section 15C if the provisions of that section had been applicable thereto.

(2) The exemption specified in sub-section (1) shall apply also to dividends payable to a company in respect of any fresh capital raised by as Indian company after the 28th day of February, 1953, by public sub-section for the purpose of increasing the production of, or starting a separate unit of, any one or more of the items specified in clause (i) of sub-section (1).'

7. It is not controverted in the present case that the assessee held certain shares of Tata Iron & Steel Co. Ltd. in the relevant previous year and in respect thereof it received an aggregate amount of dividend of Rs. 17,027. This dividend was issued in respect of new ordinary shares issued by that company and according to a certificate given by that company the dividend was exempt from super-tax in the hands of a shareholder under section 56A of the Act. When the question of charge, levy and payment of super-tax by the assessee-company under section 55 of the Act was considered, this dividend income was not subjected to super-tax in view of the provisions of section 56A. However, the Income-tax Officer felt that this was a case where undistributed profits of the assessee-company were not distributed in the requisite statutory percentage referred to in section 23A of the Act and the provisions of the said section were applicable and attracted. Primarily, the provisions of the said section 23A shall apply to a company in which the public are not substantially interested. As the assessee-company is a private limited company it is not even controverted that the provisions of section 23A do apply in the present case. Upon application of section 23A two rival contentions are urged before us. The contention on behalf of the revenue is that its provisions are self-contained and nothing contained in Chapter IX including section 56A of the Act has to be taken into for determining liability for payment of super-tax by the assessee-company under section 23A of the Act. On the other hand, on behalf of the assessee-company the argument is that whenever a question of levy of super-tax has to be considered by any taxing authority, the provisions of section 23A cannot be considered in mere isolation; all the relevant provisions contained in the Act which pertain to and are germane to the question of levy or payment of super-tax cannot be ignored and they have to be applied simultaneously and even if there is an apparent conflict attempt has to be made to harmonise the same. It is undoubtedly true that read in mere isolation the object of section 23A is to confer power upon the Income-tax Officer to assess companies to super-tax on undistributed income in cases covered by that section. If it is treated as a self-contained code then undoubtedly the contention urged on behalf of the revenue must prevail, but when there is an apparent conflict amongst the various provisions contained in a statute, then it is a well-settled principle of law that every conceivable effort should be made to harmonise the same, unless there is a clear indication to the contrary in the scheme and provisions of the Act. Both section 23A and the provisions in Chapter IX relate to charge, levy and payment of supper-tax though the scheme of the two is slightly different. Reference can be made to the observations of the Supreme Court in Navanagar Transport & Industries Ltd.'s case : [1967]63ITR663(SC) , where the Supreme Court has analysed the vital difference existing between the assessment of tax under section 23 and imposition of liability under section 23A. The Supreme Court in this case has taken the view that there is a vital difference between the assessment of tax under section 23 and imposition of liability under section 23A. Tax liability quantified by an order under section 23 is a charge statutorily imposed by sections 3 and 4 of the Act. It is true that the statutory liability is, till the last day of the year of account, ambulatory, but the charge is still a statutory charge on income. The function of the Income-tax Officer is to compute taxable income and to crystallize the charge on the taxable income. Under section 23A there is no statutory charge in respect of additional super-tax and the liability is imposed by the order of the Income-tax Officer. Source of the liability to pay additional super-tax is not in sections 3 and 4 of the Act : it lies in and arises out of the order of the Income-tax Officer. Before imposing liability for additional super-tax, the Income-tax Officer has to determine whether the company is one to which the provisions of section 23A apply; he has also to determine whether the company has distributed within twelve months immediately following the expiry of the previous year the statutory percentage of the total income of the company as reduced by the taxes and levies prescribed therein; he has also to determine whether, having regard to the losses incurred by the company in the earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable. It is after making these enquiries that the Income-tax Officer may make the order directing payment of additional super-tax at the rates prescribed. The process to be followed is not the process of assessment, but of determining whether the liability should be charged and imposed. Though strong reliance is placed by Mr. Hajarnavis upon this decision, we fail to see how the observations in this case are of any assistance in determining the controversy that arises between the parties in the present case.

8. Ordinarily, if the same topic is discussed at different places in a statute, then all the provisions pertaining to that topic in the statute should be taken into account before any question in relation thereto is finally determined. Section 23A deals with liability to pay super-tax on undistributed income by certain companies which come within the scope of that section, but the topic of super-tax is not merely dealt with in section 23A of the Act, but it is also dealt with in Chapter IX. Thus, it stands to reason that all the provisions must be looked at before any question is decided in respect of liability for payment of super-tax by a company and on a mere isolated reading of construction of section 23A such a question ought not to be determined. The material part of section 23A is as under :

'23A. (1) Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previous year are laid before the company in general meeting are less than sixty per cent. of the assessable income of the company of that previous year, as reduced by the amount of income-tax and super-tax payable by the company in respect thereof he shall, unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income : .... Provided further that this Sub-section shall not apply to any company in which the public are substantially interested or to a subsidiary company of such a company if the whole of the share capital of such subsidiary company is held by the parent company or by the nominees thereof ...'

9. The rest of the provisions of this section are not relevant for the present purpose as no controversy arises in reference thereto. The provisions of this section can only be attracted when the profits and gains distributed as dividend by a company falling within the scope of this section within twelve months immediately following the expiry of the previous year, are less than the statutory percentage of the total income of that company in that previous year as reduced in the manner therein provided. The argument of Mr. Trivedi on behalf of the assessee-company for the purpose of this section is that for determining the total income regard is not to be had merely to the three items which are contained in clauses (a), (b) and (c) which refer to reduction from total income, but he submitted that any item of income which is not subject to super-tax has to be excluded from computation of the total income for the purposes of section 23A. Reliance was placed by him upon the observations of this court in N. M. Raiji's case [1949] 17 ITR 180. In this case at page 185 this court has pointed out that :

'The scheme is that wherever one finds an exemption or exclusion from payment of tax, the exemption or exclusion also operates for the purpose of computing the total income. Not only is the sum not liable to tax, but it is also not to form part of the total income for the purpose of determining the rate. When the Legislature intends that certain sums, although not liable to tax, should be included in the total income, it expressly so provides, as it is done in section 16, and, therefore, prima facie, when we come to section 25(4) and when we find that the assessee is not liable to pay tax on the sum received by him as his share of the partnership, that sum cannot and does not form part of his total income.'

10. Ordinarily, these observations may go to support the contention which Mr. Trivedi has urged before us, but in the present case for determining the items which are to be included in the total income for the purpose of section 23A regard must be had to the entire scheme of the Act and all the provisions pertaining to charge, levy and payment of super-tax. It is undoubtedly true that under section 23A the total income of the company of the previous year is only to be reduced by the three items which are specifically enumerated in clauses (a), (b) and (c) of sub-section (1) above referred to. In none of these items the dividend of Rs. 17,027 is referred to as specific dividend. Further, it should not be overlooked that under section 56 of the Act, which deals with total income for the purpose of super-tax, the total income as assessed for the purposes of income-tax has to be regarded as total income for the purposes of super-tax. However, section 56A states that no super-tax shall be payable by a company on such part of its total income as consists of dividends received from an Indian company which companies with the conditions laid down in that section. This section clearly implies that the dividend which is not subject to payment of super-tax under this provision is a part of the total income of the company itself. It is only such dividend which complies with the requirement of section 56A that is not subject to super-tax but it does not lose the character of being part of the total income of the company which is subjected to super-tax. On the contrary, the language of section 56A by necessary implication treats such income by way of dividend as part of the total income of the company concerned. If that is so, then there is no warrant for taking the view that in determining the total income of an assessee under the main part of section 23A(1) income way of dividend to which the provisions of section 56A apply is to be excluded. As the provisions of these sections run counter to the observation in N. M. Raiji's case [1949] 17 ITR 180, the contention based on these observations cannot be accepted. Accordingly our answer to question No. 2 is in the affirmative.

11. This takes us to the third question which has been referred to at the instance of the revenue. The answer to this question depends upon the proper interpretation to be placed upon the second part of sub-section (1) of section 23A. Under that provision the Income-tax Officer has, unless he is satisfied that having regard to looses incurred by the company in earlier years or to the smallness of the profits made in the previous year the payment of a dividend or a larger dividend than that declared would be unreasonable, to make an order in writing that the company shall apart from the sum determined as payable by it on the basis of the assessment under section 23 be liable to pay super-tax at the rate of 50% in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments and at the rate of 37% in the case of any other company on the undistributed balance of the total income of the previous year, that is to say, on the total income as reduced by the amounts, if any, referred to in clauses (a), (b) or (c) and the dividends actually distributed, if any. Relying upon the provisions of this part of sub-section (1) it is strenuously urged by Mr. Hajarnavis that the undistributed balance of the total income of the previous year has to be computed only after deducting the amounts referred to in clauses (a), (b) and (c) and the dividends actually distributed, if any. No other item has to be taken into account for determining the amount of undistributed balance of the total income of the previous year. If the provisions of section 23A were the only provisions to be looked at for determining this question, then Mr. Hajarnavis is right, but we should not overlook the fact that the provisions of section 23A are penal in character. When applying these provision it will be erroneous to read the provisions of a particular section in mere isolation. Section 23A deals with liability to pay super-tax and when such liability has to be determined or considered then all the other relevant provisions pertaining to such liability for payment of super-tax cannot be ignored. It is undoubtedly true that in no part of the language of section 23A referred is to be found even impliedly to the provisions of section 56A, but section 56A is a declaratory section which deals with non-liability of a company to pay super-tax qua particular types of income by way of dividends of the nature specified therein. The material part thereof status that no super-tax shall be payable by a company on such part of its total income as consists of dividends of the nature specified in that section. Both the provisions of section 23A and of section 56A were introduced later on when the provisions of the Act were from time to time amended. Section 23A is contained in Chapter IV which deals with deductions and assessment, while section 56A is contained in Chapter IX which deals with super-tax. Both the provisions of section 23A as well as the provisions contained in Chapter IX have a common genus, namely, liability to pay super-tax. Section 55 which defined 'super-tax' as additional duty of income-tax clearly makes it clear that whenever the word 'super-tax' is used in the Act it is an additional duty of income-tax as contemplated by section 55. The expression in this Act is wide enough to include section 23A even though it is contained in Chapter IV. If the provisions of section 23A were read in mere isolation, then there will be an apparent conflict between the provisions of section 23A and those of section 56A. If the provisions of section 23A were merely looked at, then the dividend which falls within the provisions of section 56A will be subjected to liability of payment of super-tax even though section 56A states that no super-tax shall be payable by a company on such part of its total income as consists of dividends as specified therein. In our opinion, when such a situation arises, it will not be proper to treat the provisions of one as overriding those of the other and both the provisions should be harmonised together. When looked at from that point of view even in applying the provisions of section 23A the provision of section 56A shall not be overlooked as both the sections deal with the topic of super-tax. Thus, even though in section 23A no specific reference is made to dividend which is exempt from super-tax under section 56A, as all the provisions of the statute have to be taken into account for determining the liability for payment of super-tax, even in determining the statutory percentage of liability for payment of super-tax under section 23A the dividend which is exempt from super-tax cannot be ignored. In our opinion, the Tribunal was right in deducting the sum of Rs. 17,027 which was exempt from payment of super-tax under section 56A in determining the liability of the assessee-company or payment of super-tax under section 23A.

12. Accordingly, our answer to question No. 3 referred to is in the negative. As both the sides have partially succeeded, each party will bear its respective costs of the reference.


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