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Miss Mamie Bhagwandas Ahuja Vs. Controller of Estate Duty. ([1968) 69 I. T. R. (Sh. N.) 15). - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMiscellaneous Case No. 20 of 1966
Reported in[1968]70ITR439(MP)
AppellantMiss Mamie Bhagwandas Ahuja
RespondentController of Estate Duty. ([1968) 69 I. T. R. (Sh. N.) 15).
Excerpt:
.....prove his innocence. conviction of appellant is liable to be set aside. - he further held that a slice of the companys assets should be deemed to pass on the death of the deceased as the company was admittedly a controlled company within the meaning of section 17(4) of the act and the necessary conditions for the application of section 17(2) had been satisfied. -(3) where the following conditions are satisfied, that is to say, that any benefits accrued to the deceased from the company by virtue of any interest that he at any time had in shares in or debentures of the company, or by virtue of a powers having at any time been exercisable by him or with his consent in relation to shares in or debentures of the company, and apart from this sub-rule estate duty would be payable on the death..........of any power in relation to them exercisable by him, which may conveniently be described as 'share benefits', and (b) other benefits, which may conveniently be described as 'non-share benefits'. as is evident from the provisions contained in rule 11, that rule is designed to give relief from a double charge of estate duty. in fact, that rule has the heading 'limitation on, and prevention of duplication of, charge'. sub-rule (3) of rule 11 proceeds on the basis that if 'share benefits' accrued to the deceased and the shares are also liable to estate duty on his death, then it would be inequitable to levy estate duty both on the value of such shares and on the proportion of the companys assets corresponding to the 'share benefits' determined under section 17(2). therefore, rule 11(3).....
Judgment:

DIXIT C.J. - This a reference under section 64(1) of the Estate Duty Act, 1953 (hereinafter called the Act), at the instance of the accountable person, Miss Mamie Ahuja. The question, which the Appellate Tribunal (Central Board of Direct Taxes, New Delhi), has referred to this court for decision, is :

'Whether, on the facts and in the circumstances of the case, the value of the shares amounting to Rs. 1,00,000 should have been deducted from the sum of Rs. 1,14,256 in computing the value of the estate under rule 11(3) of the Estate Duty (Controlled Companies) Rules, 1953 ?'

The material facts are that Shri Bhagwandas Ahuja, father of the accountable person, Miss Mamie Ahuja, died on 6th January, 1954. The assets of the deceased consisted, amongst others, of ten shares in Motors (India) Ltd. (hereinafter referred to as the company) of the face value of Rs. 10,000 each. The subscribed and paid up capital of the company, which was originally Rs. 1,50,000 divided into fifteen share of Rs. 10,000 each, was subsequently increased to Rs. 3,00,000 by a further issue of fifteen shares of 10,000 each. Bhagwandas used to get Rs. 12,000 per annum as salary from the company. He did not receive any dividend in respect of the shares held by him; but as managing director of the company drew substantial sums by way of salary, entertainment and conveyance allowances, which in the last three accounting years before his death, aggregated to Rs. 60,000. The shares of the company were not quoted on the stock exchange.

The Assistant Controller of Estate Duty, Indore, valued the shares for estate duty purposes at Rs. 10,000 each and included the value of the shares in the principal value of the estate left by the deceased. He further held that a slice of the companys assets should be deemed to pass on the death of the deceased as the company was admittedly a controlled company within the meaning of section 17(4) of the Act and the necessary conditions for the application of section 17(2) had been satisfied. The Assistant Controller held that, having regard to the nature of duties discharged by the deceased and the business of the company, the remuneration of Rs. 60,000 drawn by him was excessive; of this remuneration he regarded Rs. 30,000 as reasonable remuneration and the remaining Rs. 30,000 as excessive remuneration. He, therefore, did not treat the reasonable remuneration of Rs. 30,000 as a benefit accruing to the deceased from the company for the purposes of section 17 of the Act. He, therefore, determined the slice of the companys assets passing on the death of the deceased under section 17 of the Act corresponding to the excessive remuneration of Rs. 30,000 received by the deceased. On this basis, he computed the value of the slice of the companys assets deemed to pass on the death of the deceased under section 17 at Rs. 1,14,256.

In the assessment proceedings of estate duty, the accountable person contended that, having regard to the provisions of rule 11(3) (b) of the Estate Duty (Controlled Companies) Rules, 1953 (hereinafter called the Rules), as the total value of Rs. 1,00,000 of the ten shares held by the deceased was less than the 'slice' of the companys assets determined under section 17, the proportion of the companys assets chargeable under section 17 was Rs. 14,256 (the proportion determined under section 17 less the value of the shares) and thus only an amount of Rs. 14,256 could be further added for charging the duty. This contention was rejected by the Assistant Controller taking the view that the relief under rule 11(3) (b) would be available only where a benefit accrued to the deceased by virtue of his shareholding; and that the excessive remuneration of Rs. 30,000 taken by the deceased could not be attributed to the shares held by him. The Assistant Controller, therefore, included the value of the slice at Rs. 1,14,256 and the value of the shares, namely, Rs. 1,00,000 in the principal value of the assets, which he computed at Rs. 2,61,205.

The accountable person then preferred an appeal before the Appellate Tribunal reiterating her contention in regard to the exclusion of the value of the shares from Rs. 1,14,256, the proportion of the companys assets chargeable under section 17 of the Act. The Appellate Tribunal also negatived the contention observing :

'In this companys case the Assistant Controller has valued the shares of the company on the basis of the assets, but the slice under section 17 has been determined by treating one-half of the salary, entertainment allowance and conveyance allowance as a benefit and not for services. The benefit that accrued to him in the shape of excessive salary is not referable, in any way, to the shares held by the deceased. The benefit allowed by sub-rule (3) of rule 11 of the Estate Duty (Controlled Companies) Rules, 1953, cannot, therefore, be allowed, so far as the slice of the assets of this company is concerned.'

The material of the Act and the Rules which require consideration are section 17 (1), (2) and (4) (i) of the Act, and rules 5(1) (a) and 11(3), (8) and (9) of the Rules. Section 17 (1), (2) and (4) (i) of the Act are in the following terms :

'17. (1) Where the deceased has made to a controlled company a transfer of any property (other than an interest to cease on his death or property which he transferred in a fiduciary capacity), and any benefits accruing to the deceased from the company accrued to him in the three years ending with his death, the assets of the company shall be deemed for the purposes of estate duty to be included in the property passing on his death to an extent determined in accordance with sub-section (2).

(2) The extent to which the assets of the company are to be deemed to be included as aforesaid shall be the proportion ascertained by comparing the aggregate amount of the benefits accruing to the deceased from the company in the last three accounting years with the aggregate amount of the net income of the company for the said years :

Provided that -

(a) where, in any of the said accounting years, the company sustained a loss, the amount of that loss shall be deducted in ascertaining the said aggregate net income of the company;...

(4) (i) A controlled company is any company which at any relevant time, was or would, if these provisions had always been in force, have been deemed to be, under the control of not more than five persons and which is not a subsidiary company or a company in which the public are substantially interested...'

Rules 5(1) (a) and 11(3), (8) and (9) of the Rules are as under :

'5. (1) The following shall be treated as benefits accruing to the deceased from the company, that is to say :

(a) any income of the company, and any periodical payment out of the resources or at the expense of the company, which the deceased received for his own benefit whether directly or indirectly, and any enjoyment in specie of land or other property of the company or of a right therefore which the deceased had for his own benefit whether directly or indirectly;

11. Limitation on, and prevention of duplication of, charge. - .....

(3) Where the following conditions are satisfied, that is to say, that any benefits accrued to the deceased from the company by virtue of any interest that he at any time had in shares in or debentures of the company, or by virtue of a powers having at any time been exercisable by him or with his consent in relation to shares in or debentures of the company, and apart from this sub-rule estate duty would be payable on the death both on the value of those shares or debentures by virtue of any provisions other than section 17 of the Act, and on the proportion of the value of the companys assets that corresponds to the benefits that so accrued to him by virtue of that section then -

(a) if the value of the shares or debentures is equal to or greater than, the said proportion, or if the Controller is satisfied that the said proportion would not, if fully ascertained be found to be substantially in excess of the value of the shares or debentures, duty on the said proportion shall not be payable;

(b) in any other case, the amount on which duty is to be charged in respect of the said proportion shall be reduced by the amount of the value of the shares or debentures...

(8) So much of any income or periodical payment or enjoyment of a kind mentioned in rule 5 as is shown to the satisfaction of the Controller to have represented or to have been such that it would if received have represented, reasonable remuneration to the deceased for any services rendered by him as the holder of an officer under the company shall, notwithstanding anything in that rule, not be treated for the purposes of these rules as a benefit accruing to the deceased from the company; and any liability of the company in respect of the remuneration of any person as the holder of an office under the company shall be treated for the purposes of these rules as incurred for the purposes of the business of the company wholly and exclusively to the extent to which it is shown to the satisfaction of the Controller that the amount thereof was reasonable and to that extent only.

(9) For the purposes of sub-rule (3) where the benefits that accrued to the deceased from the company in the relevant accounting years included benefits that accrued to him otherwise than as mentioned in that sub-rule but the deceased had at any time an interest in, or a power was at any time exercisable in relation to, shares in or debentures of the company in respect of which estate duty would be payable on his death apart from anything in that sub-rule and by virtue of that interest or power benefits accrued, to the deceased from the company in those years, or would so have accrued, to him if any payments had been made by virtue of rights attached to those shares or debentures, then -

(a) if the first mentioned benefits consisted to any extent of payments made out of moneys which, if not so applied, could have been applied in increasing the last mentioned benefits, or as payments which would have constituted such benefits; or

(b) if the first mentioned benefits are brought into the computation made under sub-section (2) of section 17 of the Act to the exclusion to any extent of the last mentioned benefits;

the first mentioned benefit shall to that extent be treated as if they had accrued to the deceased by virtue of his interest in or of the power exercisable in relation to, the said shares or debentures.'

It will be seen from section 17(1) of the Act that only three conditions are necessary to establish a prima facie claim for estate duty thereunder. The three conditions are : (i) the company must be one to which the section applies, that is, it must be a controlled company as explained in section 17(4); (ii) the deceased must have made a transfer of property to the company; and (iii) benefits must have accrued to the deceased in the three years ending with his death. If these three conditions are fulfilled, the presumptive claim for estate duty extends to a fraction of the companys net assets at the death determined in accordance with subsection (2) of section 17. In this case, there is no dispute that the Motors (India) Ltd., in which the deceased those held ten shares, was a controlled company and for acquiring those shares the deceased had made transfer of property to the company.

In regard to the benefits accruing to the deceased from the controlled company, the material provisions are those contained in rule 5(1) (a) and rule 11(8) of the Rules. Under rule 5(1) (a), any income of the company and any periodical payment out of the resources or at the expense of the company, which the deceased received for his own benefit whether directly or indirectly is treated as 'benefits accruing to the deceased from the controlled company'. But under rule 11(8) the Controller has been given the power to exclude as a benefit the receipt by the deceased of reasonable remuneration for services which he rendered as holder of an officer under the company. That sub-rule provides that if it is shown to the satisfaction of the Controller that any income or periodical payment or enjoyment of the kind mentioned in rule 5 received by the deceased represented reasonable remuneration to him for any services rendered by him as the holder of an office under the company, then that income shall, notwithstanding anything in rule 5, not be treated for the purposes of the Rules as a benefit accruing to the deceased from the company. The purpose of rule 11(8) is obvious.

It is plainly to prevent injustice and unfairness that would occur if the amount of reasonable remuneration received by the deceased is regarded as a benefit for determining the slice of the companys assets under section 17 chargeable to estate duty. Such a reasonable remuneration is, therefore, excluded as a benefit under rule 11(8) of the Rules.

In the present case, the deceased Bhagwandas received in the three years ending with his death an aggregate amount of Rs. 60,000 as remuneration consisting of salary, and entertainment and conveyance allowances. Of this amount the Assistant Controller treated Rs. 30,000 as reasonable remuneration and Rs. 30,000 as excessive remuneration. This excessive remuneration was clearly a benefit accruing to the deceased from the company as is plain from the provisions of rules 5 and 11(8). With this aggregate amount of benefit to the deceased in the last three accounting years, and taking the aggregate amount of the net income of the company in the last three accounting years at Rs. 76,670, the proportion of the company assets chargeable to estate duty under section 17 was determined by the Assistant Controller under sub-section (2) of section 17 thus :

Aggregate benefit to the deceased for 3 accounting years : Rs. 30,000.

X

Net assets of company

= Rs. 1,14,256

Aggregate net income of the company for 3 accounting years : Rs 30,000

Rs. 2,92,000

In this reference, the accountable person is not disputing the correctness of the slice of the companys assets corresponding to the excessive remuneration of Rs. 30,000 determined under section 17(2) of the Act. What she contends is that the amount of the slice determined under section 17 should have been reduced by the amount of the value of the shares of the deceased, namely, Rs. 1,00,000 treating the excessive remuneration of Rs. 30,000 as a benefit which accrued to the deceased by virtue of his interest in the shares of the company, and giving to her the relief of deduction of the value of shares from the value of the slice as provided by rule 11(3) (b) of the Rules.

In our judgment, this contention must be accepted. In coming to the conclusion that they did, both the Assistant Controller and the Appellate Tribunal overlooked the fact that section 17 and rule 11 have to be read together, and totally omitted to consider the effect of rule 11(9) of the Rules. The 'slice' under section 17 is computed on the basis of all benefits, that is to say, (a) benefits which accrued to the deceased by virtue of his interest in shares or debentures or by virtue of any power in relation to them exercisable by him, which may conveniently be described as 'share benefits', and (b) other benefits, which may conveniently be described as 'non-share benefits'. As is evident from the provisions contained in rule 11, that rule is designed to give relief from a double charge of estate duty. In fact, that rule has the heading 'Limitation on, and prevention of duplication of, charge'. Sub-rule (3) of rule 11 proceeds on the basis that if 'share benefits' accrued to the deceased and the shares are also liable to estate duty on his death, then it would be inequitable to levy estate duty both on the value of such shares and on the proportion of the companys assets corresponding to the 'share benefits' determined under section 17(2). Therefore, rule 11(3) permits reduction of the slice under section 17 in the manner stated in clauses (a) and (b) of that rule. If the 'share benefit' accrued to the deceased, then, where the value of the shares equals or exceeds the 'slice' of the companys assets corresponding to the 'share benefits', there is no claim under section 17 on such 'slice', though the 'non-share benefits' accruing to him give rise to a claim on the 'slice' corresponding to the 'non-share benefits'. This is what is provided by clause (a) of rule 11(3) of the Rules. The other clause applies where the value of the shares is less than the slice of the companys assets determined under section 17; in such a case, the amount of the 'slice' corresponding to the 'share benefits', which is chargeable to estate duty under section 17, is reduced by the amount of the value of the shares or debentures.

Rule 11(9) gives further relief in the matter of liability under section 17. For the purpose of applying sub-rules (3) and (9) of rule 11, the slice of the assets of the company under section 17 corresponding to the 'share benefits' and the slice corresponding to 'non-share benefits' have to be calculated separately. Sub-rule (9) of rule 11 envisages the situation that the two kinds of benefits may be so inter se related that any increase in one kind of benefit might result in a reduction of another kind of benefit. To illustrate, if the deceased received excessive remuneration, then that 'non-share benefit' would result in a corresponding reduction of 'share benefits', that is, dividends on the shares. It is, therefore, provided by rule 11(9) that where the deceaseds shares benefits could have been increased if he had not taken 'non-share benefits', the 'non-share benefits' shall be treated as 'share benefits', for the purposes of sub-rule (3), to the extent that they could have been applied in increasing the 'share benefits'. This is provided by clause (a) of rule 11(9). If, therefore, actual dividends, that is, 'share benefits', accrued to the deceased, then those 'share benefits' would be increased by the operation of rule 11(9) (a), and the slice of assets based on the 'share benefits' would be calculated after taking into account such increase. It is on this basis that rule 11(3) has to be applied. Clause (b) of rule 11(9) deals with the position when in the computation of the 'slice' under section 17 only 'non-share benefits' are brought in to the exclusion to any extent of 'share benefits'. In such a case, the entire 'non-share benefit', which alone comes into computation under section 17, is treated as 'share benefit' for the purposes of sub-rule (3). The principle on which clause (b) of rule 11(9) has been framed seems to be that, if the deceased has at any time an interest in shares or any power in relation to them exercisable by him or with his consent and if there accrued to him only 'non-share benefits' and no 'share benefits', then the 'non-share benefits' can legitimately be attributed to the shareholding.

In the case before us, the deceased Bhagwandas did not get any dividend on his shares. He did not get any 'share benefits'. He only got 'non-share benefits' in the form of remuneration consisting of salary, entertainment allowance and conveyance allowance. The excessive remuneration of Rs. 30,000 determined by the taxing authorities, though a 'non-share benefit', has to be treated, for the purposes of sub-rule (3) of rule 11, as a 'share benefit' under rule 11(9) (b) as the deceased Bhagwandas having no 'share benefits' only, the 'non-share benefit' of Rs. 30,000 was brought into computation of the slice under section 17(2) of the Act. If, therefore, the excessive remuneration of Rs. 30,000 is, by virtue of rule 11(9) (b), a 'share benefit' then sub-rule (3) of rule 11 comes into operation, and for the purposes of sub-rule (3) the 'slice' corresponding to Rs. 30,000, determined under section 17, has to be recorded as 'share benefits slice'. The amount of the slice corresponding to Rs. 30,000, being Rs. 1,14,256, under clause (b) of rule 11(3), the amount of the value of the shares has to be deducted from the amount of the slice. Thus, in respect of excessive remuneration of Rs. 30,000 slice, which is to be treated as 'share benefits slice' by virtue of rule 11(9) (b), the estate duty payable would be on Rs. 14,256 only.

The accountable person had no doubt urged before the Appellate Tribunal that if the deceased Bhagwandas had not taken the salary and allowances which he did from the company, the benefit accruing to him by virtue of his holding shares would have increased, and, consequently, the entire benefit of Rs. 30,000 should be treated as attributable to shares. This argument was obviously founded on the provisions of clause (a) of rule, 11(9). But that clause has no applicability here, as no 'share benefit' accrued to the deceased in the form of dividends. The Appellate Tribunal has nowhere found that besides the 'non-share benefit' of Rs. 30,000, the deceased got any 'share benefit'. As no 'share benefit' accrued to the deceased, and in the computation of the slice under section 17 only the non-share benefit was taken into account it is clause (b) of rule 11(9) that applies and makes the 'non-share benefits' of Rs. 30,000 as 'share benefits' for the purposes of rule 11(3) of the Rules. As we have endeavoured to point out earlier under rule 11(9) (b) and rule 11(3) (b), the duty payable on the slice under section 17 corresponding to Rs. 30,000 is only on Rs. 14,256.

The accountable person was also not right in her submission that if the deceased Bhagwandas had not received the allowances that the he did, then he would have received the whole amount of Rs. 30,000 as dividends. If the deceased had not received the excessive remuneration, then it would have been divided between the shareholders as dividend if the company had divided to give dividend on the shares. In that case, Bhagwandas, who held one-third of the share-capital, would have received only Rs. 10,000 by way of dividends in the three years ending with his death and not Rs. 30,000. Thus, out of the benefit of Rs. 30,000, Rs. 10,000 would have constituted 'share benefit' and Rs. 20,000 as 'non-share benefit'. As the deceased Bhagwandas did not actually get any 'share benefit' in the form of dividend, rule 11(3) read with rule 11(9) would have then operated in the following manner.

I. Rs. 10,000 being the dividend amount which Bhagwandas would have received did excessive remuneration of Rs. 30,000 had not been paid to him.

The slice under section 17(2) corresponding to this share-benefit would be

Rs. 10,000 X Rs. 2,92,000 = 38,0851/3

Rs. 76,670

II. The remaining excessive remuneration of Rs. 20,000 would be non-share benefit.

The slice under section 17(2) corresponding to this non-share benefit would be

Rs. 10,000 X 2,92,000 = 76,170 2/3

Rs. 76,670

III. In respect of the share benefit slice, namely,

(a) Rs. 38,085 1/3 no estate duty would be payable under rule 11, sub-rule 3 (a), as the value of the shares exceeds the slice amount.

(b) In respect of non-share benefit slice, the estate duty would be payable on Rs. 76,170 2/3.

If, therefore, the contention advanced by the accountable person before the Appellate Tribunal had been acceded to by us, the slice under section 17 chargeable to duty would have been Rs. 76,170 2/3, and not only Rs. 14,256 as urged by her. As we have pointed out earlier, it is clause (b) of rule 11(9) that applies in the present case, and on the basis of that clause and clause (b) of rule 11(3), the slice amount of Rs. 1,14,256 corresponding to excessive remuneration of Rs. 30,000 determined under section 17 has to be reduced by the value of the shares. Thus, the amount chargeable to duty under section 17 is only Rs. 14,256.

In this case, the guidance and authority of any decision of any High Court or of the Supreme Court was not available to us. But we have been able to approach the matter with some confidence with the aid of the arguments advanced by learned counsel for the parties and of the exposition of section 51(2) of the U. K. Finance Act, 1940 (3 & 4 Geo. 6, c. 29), and paragraph 5 of the Seventh Schedule to that Act, given in Dymonds Death Duties and Green Death Duties. The provisions contained in sub-rules 1 to (8) of rule 11 of the Estate Duty (Controlled Companies) Rules. 1953 are pari materia with section 51 of the English Act. Sub-rules (1) and (2) of rule 11 correspond to sub-sections (1) and (1A) of section 51 of the U. K. Finance Act, 1940, and sub-rule (3) of rule 11 corresponds to section 51(2) of that Act. Paragraph 5 of the Seventh Schedule to the U. K. Finance Act, 1940; is pari material with sub-rule (9) of rule 11 of the Rules. In Dymonds Death Duties (14th edition, volume 1), it has been stated at page 490 :

'Just as for the purpose of section 51(1) it was necessary to distinguish between be befits received by virtue of the transfer and other benefits, so for the purpose of section 51(2) it is necessary to distinguish between (a) benefits which accrued to the deceased by virtue of his interest in shares or debentures, or by virtue of any power in relation to them exercisable by him or with his consent, and (b) other benefits. If benefits of both types accrued to the deceased, the primary slice (or what is left of it after applying the ceiling) must be divided into two parts. One part, corresponding to the benefits at (a), will be called the share benefits slice; the other corresponding to the benefits at (b), may be called the non-share benefit slice. Only the share-benefit slice can be given relief under section 51(2).

Paragraph 5 of the Schedule VII provides that, in cases where the deceaseds share benefits could have been increased if he had not taken non-share benefits, the non-share benefits shall be treated as share benefits to the extent that they could have been applied in increasing the share benefits. For example, if the deceased received excessive remuneration, the proportion of it corresponding to his shareholding will be treated as a share benefit.'

Sub-sections (1) and (2) of section 46 of the U. K. Finance Act, 1940, correspond to sub-sections (1) and (2) of section 17 of our Estate Duty Act, 1953. On the avoidance of duplicate charge, it has been stated in Greens Death Duties (5th edition) at page 218 :

'Where estate duty is payable on a proportion of the assets of a company under section 46 and would also be payable on shares or debentures of the company in which the deceased at any time had an interest relief from a double charge of duty is afforded. For this purposes, a distinction is made between -

A. benefits which accrued to the deceased by virtue of an interest that he at any time had in the shares or debentures in question, or by virtue of a power having been at any time exercisable by him or with consent in relation to such shares, etc., and

B. any other benefits (including benefit attributable to any other shares, etc., held by the deceased which are not themselves taxable).

As between A. and B.

(1) Where the deceased received, as consideration for an addition of assets, any interest, in shares, etc., the notional benefit prior to the addition is attributed to that interest.

(2) Benefits which accrued otherwise than as at A. are nevertheless treated as falling within A., where and so far as the money or other property, if not applied as it was in fact applied, could have been applied in increasing the benefits at A. (Finance Act, 1940, Schedule VII). For instance, if the deceased took paragraph 5 as unreasonable remuneration, amounts which he could have taken as dividends, those amounts are attributed to the shares.'

The passages reproduced above support the view we have expressed about the effect and operation of section 17 (1) and (2) of the Act and rule 11(3) and (9) of the Rules.

For the foregoing reasons, our answer to the question propounded is that the value of the shares amounting to Rs. 1,00,000 should have been deducted from the sum of Rs. 1,14,256 in computing the value of the estate under rule 11(3) of the Estate Duty (Controlled Companies) Rules, 1953. The accountable person shall have costs of this reference. Counsels fee is fixed at Rs. 250.


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