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1993 (12) TMI 12
Issues Involved: 1. Applicability of Section 64 of the Income-tax Act, 1961, to the gifts made by the assessee and his brother. 2. Validity of the addition of Rs. 7,195 to the assessee's income under Section 64 of the Income-tax Act, 1961.
Issue-wise Detailed Analysis:
Issue 1: Applicability of Section 64 of the Income-tax Act, 1961, to the gifts made by the assessee and his brother The primary question was whether the gift of a one-third share of land by the assessee's brother to the assessee's wife falls under the mischief of Section 64 of the Income-tax Act, 1961. The Tribunal initially held that the gift did not attract Section 64 since the assessee had made gifts to his major nephews, and his brother had independently gifted land to the assessee's wife.
However, the High Court referenced a previous decision involving the same parties (CIT v. Mohmadmiya A. Topiwala [1994] 207 ITR 711) where it was determined that the transfer by the assessee's brother was indirectly a transfer by the assessee. The court concluded that the gift to the assessee's wife was a strategic move to circumvent legal liabilities, thus falling under Section 64(1)(iii). The court reiterated that the Tribunal's finding of no intimate connection between the transfers was incorrect and that the transfers were indeed interconnected.
The court dismissed the assessee's argument that the previous judgment lacked jurisdiction, affirming that the High Court could not reappraise the Tribunal's factual findings unless specifically challenged as perverse. The court upheld that the Tribunal's inference was a mixed question of law and fact, thereby justifying the High Court's interference.
Issue 2: Validity of the addition of Rs. 7,195 to the assessee's income under Section 64 of the Income-tax Act, 1961 The second question pertained to the inclusion of Rs. 7,195, paid as interest to the assessee's wife, in the assessee's income under Section 64. The Tribunal had confirmed the Appellate Assistant Commissioner's order deleting this addition, based on the reasoning that the income did not arise directly or indirectly from the assets transferred by the assessee to his wife.
The High Court disagreed, emphasizing that the interest income had a proximate connection with the transfer of assets. The court distinguished the present case from CIT v. Prem Bhai Parekh [1970] 77 ITR 27 (SC) and CIT v. Prahladrai Agarwala [1989] 177 ITR 398 (SC), where the Supreme Court had ruled that income must have a proximate connection with the transfer of assets to be included under Section 64. The court noted that in the current case, the assessee's wife invested the sale proceeds from the gifted land with the assessee, who paid her interest, thus establishing a direct connection.
The court held that all conditions under Section 64(1)(iii) were satisfied: (i) There was a transfer of assets by the assessee to his wife. (ii) The transfer was without adequate consideration. (iii) The income (interest) arose directly from the transferred assets.
Therefore, the High Court concluded that the Tribunal erred in confirming the deletion of Rs. 7,195 from the assessee's income. The court answered the second question in favor of the Revenue, affirming the inclusion of the interest amount in the assessee's income under Section 64.
Conclusion: Both questions referred to the High Court were answered in favor of the Revenue. The court held that the gifts made by the assessee and his brother fell within the scope of Section 64 of the Income-tax Act, 1961, and that the interest income of Rs. 7,195 should be included in the assessee's income. The reference was disposed of with no order as to costs.
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1993 (12) TMI 11
Issues: Assessment of income from other sources and capital gains in the hands of a body of individuals under the Portuguese Civil Code.
Analysis: The judgment pertains to the assessment year 1975-76, involving a married couple governed by the Portuguese Civil Code. The Income-tax Officer initially assessed their income as a body of individuals, which was challenged in appeal. The Commissioner of Income-tax (Appeals) and the Tribunal both ruled that the income should be assessed separately in the hands of each spouse. The key question referred to the High Court was whether the income from other sources and capital gains should be assessed in the hands of the body of individuals or separately for each spouse.
The High Court analyzed the provisions of the Portuguese Civil Code, specifically highlighting that under Goan customary law, both spouses have a fixed half share in income from dividends, interest, and capital gains. Referring to previous judgments, the court emphasized that income possessed by the communion of interest of husband and wife should be assessed in equal shares in the hands of each spouse individually. The court also cited cases where similar principles were applied to gift-tax assessments and income from business run by the communion.
Furthermore, the court distinguished between income derived from investments held jointly by the spouses and income arising from business activities of the communion. It was established that income from investments, including interest, dividends, and capital gains, should be assessed separately for each spouse as individuals. The court also referenced a Supreme Court judgment regarding wealth-tax, emphasizing that joint rights in property due to marriage under the Portuguese Civil Code do not create an association of persons for tax purposes.
Ultimately, the High Court concluded that the income from other sources and capital gains should be assessed separately for each spouse, affirming the decisions of the lower authorities. The judgment clarified that the assessment did not involve income from business activities of the communion, focusing solely on income from investments. The ruling was in favor of the assessees, with no order as to costs.
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1993 (12) TMI 10
Issues: 1. Application to quash criminal process under section 482 of the Criminal Procedure Code. 2. Interpretation of section 276C of the Income-tax Act, 1961 regarding wilful evasion of tax payment. 3. Analysis of legal definitions of "evasion" in relation to tax laws. 4. Examination of mens rea element in tax evasion cases. 5. Differentiation between evasion before and after assessment under section 276C(2). 6. Assessment of wilful attempt to evade tax payment in specific cases.
Analysis: The judgment by B. C. Patel of the High Court of Gujarat dealt with two applications seeking to quash criminal processes under section 482 of the Criminal Procedure Code. The petitions involved allegations of wilful evasion of tax payment under section 276C of the Income-tax Act, 1961. The first case, arising from Criminal Case No. 339 of 1986, accused the petitioner of failing to pay advance tax and evading tax payment from December 15, 1980, to September 29, 1981. The petitioner argued that there was no intention to evade payment as all penalties were paid and no underhand dealing was involved.
The interpretation of section 276C was crucial in determining the wilful evasion element. The petitioner's advocate highlighted the necessity of positive averments in the complaint to prove tax evasion. Reference was made to legal definitions of "evasion" from various dictionaries to emphasize the intentional avoidance of tax through deceit or underhand dealings. The court examined past judgments, including the Privy Council case of Simms v. Registrar of Probates, to understand the concept of evasion in tax matters.
The judgment also delved into the mens rea element in tax evasion cases, emphasizing that the element of intent must be established for imposing penalties under section 276C. The court cited the Supreme Court decision in Gujarat Travancore Agency v. CIT to support the requirement of mens rea in tax evasion cases. It was argued that mere failure to file a return does not necessarily indicate dishonest or mala fide intentions, and mens rea is essential for prosecution under section 276C.
Furthermore, the court differentiated between evasion before and after assessment under section 276C(2). It clarified that sub-section (2) applies to cases of evasion after the assessment has been made, where the taxpayer attempts to evade payment of determined taxes. The court rejected the argument that the case fell under section 276C(2) due to failure to pay advance tax, as the evasion must occur after the tax amount is determined.
Ultimately, the court quashed the criminal processes in both cases, ruling that there was no evidence of wilful attempt to evade tax payment as required under section 276C(2). The judgment highlighted the importance of proving mens rea and intentional evasion in tax matters, emphasizing the need for clear allegations and evidence to support criminal prosecution for tax evasion.
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1993 (12) TMI 9
Issues Involved: The judgment involves the interpretation of sections 194A, 2(31), and 161(1) of the Income-tax Act, 1961 regarding the liability of trustees to deduct and pay tax on interest amounts credited to payees' accounts.
Interpretation of Section 194A: The complaints were filed against the petitioners for alleged breaches under section 276B read with section 278B of the Income-tax Act, 1961. The complaints were related to failure to deduct tax from interest amounts credited to payees' accounts and failure to pay the tax after deduction. The petitioners contended that section 194A of the Act, which pertains to deduction of income tax on interest payments, was not applicable to their case.
Liability of Trustees: The complainants argued that as the petitioners included a trust and trustees, they were responsible for deducting and paying the tax on interest amounts credited to payees. They cited sections 2(31) and 161(1) of the Act to support their claim that both the trust and trustees should be held liable for the tax obligations. However, the petitioners' counsel argued that trustees should be assessed in the same manner as beneficiaries, relying on a Supreme Court decision in a similar context.
Legal Position and Decision: The court analyzed the legal provisions and the arguments presented. It concluded that section 194A of the Income-tax Act, 1961, was not applicable to the petitioners' case. Therefore, there was no basis for the alleged offences under section 276B read with section 278B of the Act. The court held that the process issued against the accused should be quashed, and subsequently, the applications were dismissed. The ruling clarified that trustees were not liable under section 194A in this scenario, leading to the dismissal of the complaints against the petitioners.
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1993 (12) TMI 8
Issues: 1. Interpretation of statutory deductions under the Companies (Profits) Surtax Act, 1964 for assessment years 1975-76 and 1976-77. 2. Treatment of deductions under sections 80G and 80M of the Income-tax Act, 1961 for computing capital employed. 3. Exclusion of unclaimed dividends while computing capital employed for the assessment year 1976-77.
Analysis: 1. The court addressed the questions of law related to the computation of capital employed for statutory deduction under the Companies (Profits) Surtax Act, 1964 for the assessment years 1975-76 and 1976-77. The court referred to previous decisions and answered the questions in favor of the assessee based on established case law.
2. The court deliberated on the treatment of deductions allowed under sections 80G and 80M of the Income-tax Act, 1961 for computing capital employed. The court relied on precedents and held that such deductions could not be considered as sums not "includible" in the total income for income-tax assessment, thus not falling for deduction under the Companies (Profits) Surtax Act, 1964.
3. The issue of excluding unclaimed dividends while computing capital employed for the assessment year 1976-77 was contested. The court analyzed the distinction between "provision" and "reserves" as per relevant statutes. Referring to the Supreme Court decision in Vazir Sultan Tobacco Co. Ltd. v. CIT, the court emphasized the necessity of clear earmarking or separation of funds to constitute a reserve. The court concluded that unclaimed dividends, being a known liability, should not have been included in general reserves for computing capital employed.
The court highlighted the importance of express indication by directors regarding the utilization of funds and emphasized that dividends are typically paid from current income unless specified otherwise. The judgment affirmed the exclusion of unclaimed dividends from general reserves for computing capital employed, ruling in favor of the Revenue. The court dismissed the Tribunal's decision to include unclaimed dividends in general reserves, emphasizing the need for explicit authorization for such inclusion.
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1993 (12) TMI 7
Issues: Validity of section 2(2) of the Finance Act, 1977 regarding aggregation of agricultural income with total income for taxing purposes.
Analysis: The petitioners challenged the constitutionality of section 2(2) of the Finance Act, 1977, which allowed for the aggregation of agricultural income with total income for tax purposes. The petitioners argued that agricultural income should not be included in the total income for tax calculation as it was not contemplated in the Income-tax Act, 1961. They contended that such aggregation would lead to double taxation and violate Article 246 of the Constitution of India.
The Division Bench judgments of the Kerala High Court and the Karnataka High Court upheld the validity of similar provisions in the Finance Acts of 1973 and 1974. They reasoned that while agricultural income is excluded from the charge of income tax, the Finance Acts provided for specific provisions allowing for the inclusion of agricultural income in total income for rate calculation purposes. The courts held that such provisions did not exceed the legislative competence of Parliament and were valid under the Constitution.
The Karnataka High Court further explained that Parliament, under entry 82 of List I of the Seventh Schedule, had the power to include agricultural income for computing total income without subjecting it to tax. The court emphasized that the classification of assessees with agricultural income for higher tax rates on their net income was based on the capacity to pay tax and was not arbitrary. The court concluded that the provisions in the Finance Act, 1976, regarding the aggregation of agricultural income with total income for rate purposes were constitutional and did not violate articles 14 and 19 of the Constitution.
In line with the Division Bench judgments of the Kerala and Karnataka High Courts, the Madras High Court, in this case, upheld the constitutional validity of section 2(2) of the Finance Act, 1977. The court held that the aggregation of agricultural income with total income for tax calculation purposes was within the legislative competence of Parliament. Consequently, the writ petitions challenging the provision were dismissed, and no costs were awarded.
In conclusion, the court found that the inclusion of agricultural income in total income for rate calculation purposes was constitutionally valid and fell within the legislative powers of Parliament. The judgments of the Kerala and Karnataka High Courts provided the legal basis for upholding the provision in question, and the writ petitions were dismissed accordingly.
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1993 (12) TMI 6
Issues Involved: 1. Interpretation of Section 54 of the Income-tax Act, 1961, prior to its amendment by the Finance Act, 1982. 2. Requirement of continuous use of the residential property for claiming exemption under Section 54. 3. Differing judicial interpretations by various High Courts on the matter.
Detailed Analysis:
1. Interpretation of Section 54 of the Income-tax Act, 1961: The primary issue revolves around the interpretation of Section 54 of the Income-tax Act, 1961, as it stood before the amendment by the Finance Act, 1982. The section provided for exemption from capital gains tax if the property transferred was used by the assessee or their parents for residence "in the two years immediately preceding the date on which the transfer took place." The court needed to determine whether this meant continuous use for the entire two years or if intermittent use within the two years was sufficient.
2. Requirement of Continuous Use of the Residential Property: The court examined whether the assessee or his parents must have used the residential house for an unbroken and continuous period of two years before the transfer to claim exemption. The High Courts of Madras and Gujarat held that continuous use for two years was necessary, while the Karnataka High Court opined that any use within the two years was sufficient. The Delhi High Court took a middle ground, suggesting that the house must have been "mainly" used for residence during the relevant period, even if not continuously.
3. Differing Judicial Interpretations: The judgment reviewed various interpretations by different High Courts: - Madras and Gujarat High Courts: These courts insisted on continuous and unbroken use for two years to claim the exemption. - Karnataka High Court: This court held that any use within the two years sufficed. - Delhi High Court: This court emphasized that the house must have been "mainly" used for residence during the two years, even if not continuously.
Court's Conclusion: The court concluded that the original asset must have been "mainly" used for personal residence by the assessee or his parents in the two years immediately preceding the transfer. The use must be substantial and not occasional or casual. The court rejected the extreme views of the Madras and Gujarat High Courts, which required continuous use, and the Karnataka High Court, which allowed for any use within the two years. Instead, it aligned with the Delhi High Court's interpretation, emphasizing the word "mainly" to indicate significant use for residence.
Application to the Case: In the case at hand, the assessee's parents used the original flat for only two months before its transfer. The court held that this did not meet the requirement of "mainly" using the property for residence during the two years before the transfer. Consequently, the assessee was not entitled to the exemption under Section 54.
Final Judgment: The court answered the referred question in the negative, ruling in favor of the Revenue. It held that the assessee did not satisfy the conditions for exemption under Section 54 as interpreted by the court. The court also noted that there would be no order as to costs.
Summary: The court clarified that for exemption under Section 54, the residential property must be "mainly" used for residence by the assessee or their parents in the two years preceding the transfer. This use need not be continuous but must be substantial. The court rejected the interpretations requiring continuous use and those allowing any use within the two years, favoring a balanced approach that considers significant residential use.
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1993 (12) TMI 5
Issues Involved: 1. Deductibility of foreign tour expenses u/s 37(1) of the Income-tax Act.
Summary:
Issue 1: Deductibility of Foreign Tour Expenses u/s 37(1) of the Income-tax Act
The primary issue in this case is whether the foreign tour expenses incurred by the assessee-company for Smt. Kamalini Sarabhai are deductible u/s 37(1) of the Income-tax Act. The Revenue argued that there is no evidence to show that Smt. Kamalini Sarabhai's visit was necessary for facilitating negotiations at the top level with foreign corporations. The fact that the Reserve Bank authorities sanctioned the necessary foreign exchange does not indicate that the expenditure was wholly and exclusively for business purposes.
The assessee contended that the visit was necessary for business negotiations and that the Reserve Bank's sanction of foreign exchange supports this claim. However, the court noted that the onus of proving that such deductions are permissible falls on the assessee. The conditions for deductibility u/s 37(1) include that the expenditure should not be of a personal nature, should be incurred in the accounting year, and must be laid out wholly and exclusively for business purposes.
The court found that the assessee failed to provide evidence showing how Smt. Kamalini Sarabhai's visit was necessary for business negotiations. There was no evidence of her qualifications, business experience, or the nature of negotiations that took place. Additionally, she was not a director or executive of the company, nor was there any record of her having a special aptitude for the business. The court concluded that the expenditure was not incurred wholly and exclusively for business purposes and was, therefore, not deductible u/s 37(1).
The court referenced previous judgments, including CIT v. T. S. Hajee Moosa and Co. and Bombay Mineral Supply Co. Pvt. Ltd. v. CIT, which held that expenses with a dual or personal purpose do not qualify for deduction. The court emphasized that the expenditure must be incurred solely for business purposes, unalloyed with any other consideration.
In conclusion, the court held that the expenses incurred by the assessee on the foreign tour of Smt. Kamalini Sarabhai were gratuitous and for purposes outside the course of business. The Tribunal's decision to allow the claim was overturned, and the expenditure was not deductible u/s 37(1) of the Act.
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1993 (12) TMI 4
Issues: 1. Application under section 273A of the Income-tax Act for waiver of interest and penalty. 2. Violation of principles of natural justice in passing the order. 3. Compliance with conditions precedent for invoking section 273A of the Act.
Detailed Analysis: The petitioner filed income-tax returns for several assessment years and was aggrieved by the levy of interest under sections 139 and 217 of the Income-tax Act. The petitioner applied under section 273A of the Act for waiver of the interest. However, the respondent rejected the application citing non-compliance with the conditions stipulated in section 273A for waiver of penalty and interest. The respondent noted that the petitioner had not paid the taxes on the admitted income for certain years and had not made arrangements for payment of tax arrears for other years. The respondent found that the petitioner's filing of returns was prompted by a real estate investment, not genuine compliance with tax obligations.
The petitioner argued that the order violated the principles of natural justice and should be set aside. The petitioner contended that taxes were paid based on the returns for most years, and therefore, interest should have been waived. The respondent, on the other hand, argued that there was no violation of natural justice and that the petitioner had not met the conditions precedent for invoking section 273A. The respondent relied on a judgment from the Kerala High Court to support this position.
The court examined the contention of natural justice violation and found that the petitioner was represented by an authorized person during the proceedings, thus rejecting the argument of lack of opportunity to present the case. Regarding compliance with conditions precedent for invoking section 273A, the court noted that the petitioner had not paid taxes on admitted income for certain years and had not settled the tax differences for other years. The court referred to precedents to support the decision that non-compliance with conditions under section 273A precludes invoking its provisions.
In conclusion, the court dismissed the writ petition, upholding the respondent's decision to reject the application under section 273A due to non-compliance with the statutory conditions. The court found no merit in the arguments of natural justice violation and upheld the decision based on legal precedents cited during the proceedings.
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1993 (12) TMI 3
Issues Involved: 1. Whether the Income-tax Appellate Tribunal rightly disallowed Rs. 43,633 being the amount deducted from the sale proceeds of alcohol and spirit and transferred to the storage fund for molasses and alcohol account under the Ethyl Alcohol (Price Control) Amendment Order, 1971. 2. Whether the Tribunal rightly deleted the disallowance of Rs. 16,041 made by the Department under section 40A(5) of the Income-tax Act, 1961.
Issue 1: Disallowance of Rs. 43,633 Transferred to Storage Fund
The assessee, engaged in manufacturing rectified spirit and other chemicals, was required by the Ethyl Alcohol (Price Control) Amendment Order, 1971, to transfer Rs. 6 per kilolitre from the sale proceeds of rectified spirit to a storage fund for molasses and alcohol. This amount was to be used exclusively for constructing storage facilities as per statutory directions. The assessee argued that this amount should not be included in its total income as it was statutorily diverted at source.
The court noted that the selling price of rectified spirit was statutorily fixed and included Rs. 6 per kilolitre for the storage fund, which was a statutory diversion at source. This amount did not reach the assessee as income but was earmarked for the storage fund. The court held that the assessee lost domain over this amount, which had to be used as per statutory directions, and therefore, it could not be considered part of the assessee's real income.
The court referenced the Karnataka High Court's decision in CIT v. Pandavapura Sahakara Sakkare Kharkane Ltd. [1992] 198 ITR 690, where a similar statutory diversion under the Molasses Control Order was held not to be part of the assessee's income. The court agreed with this view, emphasizing that the statutory compulsion and the lack of control over the amount by the assessee indicated a clear diversion at source.
The court disagreed with the Madhya Pradesh High Court's decision in Jiwajirao Sugar Co. Ltd. v. CIT [1989] 176 ITR 182, which held that the amount directed to the storage fund was part of the assessee's income. The court emphasized that the ownership of the fund was not relevant; what mattered was the statutory compulsion and the lack of domain over the amount.
The court also referenced decisions from the Kerala High Court in Cochin State Power and Light Corporation Ltd. v. CIT [1974] 93 ITR 582 and the Bombay High Court in Amalgamated Electricity Co. Ltd. v. CIT [1974] 97 ITR 334, which supported the view that statutory diversions at source do not form part of the assessee's real income.
The court concluded that the amount of Rs. 43,633 did not form part of the assessee's income for the assessment year 1974-75 and answered the question in favor of the assessee.
Issue 2: Deletion of Disallowance of Rs. 16,041 under Section 40A(5)
The court noted that both parties agreed that the answer to this question should be in the affirmative and in favor of the assessee, based on the decisions in CIT v. Hico Products (P.) Ltd. (No. 2) [1993] 201 ITR 575 and CIT v. Hico Products Pvt. Ltd. (No. 1) [1993] 201 ITR 567. Consequently, the court answered this question in the affirmative and in favor of the assessee.
Conclusion
The court held that the amount of Rs. 43,633 did not form part of the assessee's income for the assessment year 1974-75 and answered the first question in favor of the assessee. The court also answered the second question in the affirmative and in favor of the assessee. No order as to costs was made.
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1993 (12) TMI 2
Issues: 1. Applicability of sections 40(c) and 40A(5) to a director-employee. 2. Determination of remuneration for a director who is also an employee. 3. Inclusion of gratuity in remuneration for disallowance under sections 40A(5)/40(c). 4. Relevance of the point of time for payment under section 40(c). 5. Limitation on expenditure disallowance for reasonable payments. 6. Disallowance of specific amounts paid to a director-employee.
Analysis: The High Court of Bombay was presented with a reference under section 256(1) of the Income-tax Act, 1961, regarding various questions related to the assessment year 1975-76 concerning a director-employee of an assessee-company. The primary issue revolved around whether the provisions of section 40(c) or section 40A(5) applied to the case. The court held that in the case of a director-employee, both sections are applicable, and the higher of the two ceilings must be applied. This decision was influenced by the Supreme Court's judgment in CIT v. Indian Engineering and Commercial Corporation P. Ltd. [1993] 201 ITR 723.
Regarding the inclusion of gratuity in the remuneration for disallowance, the court referred to a previous decision in CIT v. Colgate Palmolive (India) Pvt. Ltd. [1994] 210 ITR 770. The court ruled that the expenditure on payment of retirement gratuity was not covered under sections 40(c) or 40A(5) but was deductible under section 37(1) of the Income-tax Act, 1961. Thus, the court answered this question in favor of the assessee.
As a consequence of the above rulings, questions related to the point of time for payment under section 40(c) and the limitation on expenditure disallowance did not require an answer. However, a specific sum paid to the director-employee was subject to disallowance. The court directed the Tribunal to recompute the disallowance amount after excluding the gratuity payment and considering the aggregate ceiling of Rs. 72,000 applicable to the case.
Ultimately, considering the facts and circumstances, the court made no order as to costs, concluding the judgment on the referenced issues related to the Income-tax Act, 1961.
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1993 (12) TMI 1
Whether the Commissioner of Income-tax, in the facts and circumstances of the case, was justified in refusing to exercise his power under section 273A of the Act was a question which was required to be examined on the merits - case is remanded - order of HC is accordingly set aside
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