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TMI Blog1969 (2) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... e and involved common contentions. Before the Tribunal, the department had also filed appeals relating to the assessment years 1952-53 and 1953-54 and they were also disposed of by the same order. One Ramnath, son of Ramkrishna Agarwal of Kamptee, was doing business of manufacture and sale of bidis. He died on 23rd of February, 1948. On 10th of February, 1948, he had executed a will disposing of the property and the business. In that will he made certain arrangement for his wife and also for his son-in-law and other relations of his. According to this arrangement made in the will, an amount of Rs. 6,971 each was paid to Chandabai and Madan Mohan Jaipuria, Rs. 3,485 to Pushkarraj Dharmashala, Rs. 3,900 to Chhugnibai during the year 1951-52. These sums were disallowed by the Income-tax Officer as being merely an appropriation of income after it had accrued to the family. This was upheld by the Appellate Assistant Commissioner in appeal. The Appellate Assistant Commissioner seems to have taken the view that Ramnath was assessed in his lifetime in the status of a Hindu undivided family and, therefore, he had no right to execute the will. The Income-tax Officer further applied the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... catalogued and an effort made to value (in terms of money) the effect of such defects which can then be added back to the income. In other words, in such a case the proviso to section 13 should not be applied by way of an application of a flat rate over the turnover but reasonable add-backs made in respect of specific defects noticed." In this view, the Appellate Tribunal set aside the assessments and the Income-tax Officer was directed to make specific additions to the book profits in terms of the defects noticed after giving the assessee a proper opportunity to state and prove his case. Since the assessment orders were set aside by the Appellate Tribunal, the Tribunal also directed the Income-tax Officer to give an opportunity to the assessee to prove his case that Ramnath was an individual who was competent to execute the will which he did and subject to the verification of such claim it was directed that the payment (to the four persons aforementioned) be allowed. The operative part of the order of the Tribunal reads as under : " 16. In the result, we set aside the three assessments for all the years and direct that- (a) the assesseee should be given an opportunity of provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------------------------------------------------------------------- under s. 143(2) of the Income-tax Act, 1961. Dated: 6-4-1967. No. R. 201. TO Ramkrishna Ramnath (H.U.F.), Kamptee. Dear Sir -------------- Dear Madam, There are certain points in connection with the return of income submitted by you for the assessment year 1951-52 in regard to which I should like to have some further information. You are hereby required to attend my office at Nagpur on April 20, 1967, at 11.00 A.M. either in person or by a representative duly authorised in writing in this behalf, or to produce or cause to be there produced at the said time any documents, accounts, and other evidence on which you may rely in support of the return filed by you. (Sd.) G. Laksmi Narasimhan, Income-tax Officer, Central Circle III, Nagpur." The petitioner has challenged the seven notices issued to the petitioner by the Income-tax Officer and has asked for a writ of certiorari to quash the notices dated 6th April, 1967, issued under section 23(2) of the Indian Income-tax Act, 1922, by the Income-tax Officer and has further asked for a writ of mandamus restraining the said officer from proceeding in pursu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proviso beyond the period of 4 years prescribed in sub-section (3), but the said second proviso to sub-section (3) of section 34 is ultra vires article 14 of the Constitution, and, hence, could not be availed of by the department and if the said proviso is not available, then no assessment could be made against the petitioner in pursuance of the notices dated April 6, 1967, which are much beyond the period of 4 years from the end of all the assessment years in question. The third ground of attack was that even if the second proviso is available to the department, then the directions or findings which have been given by the Income-tax Appellate Tribunal or the Appellate Assistant Commissioner are not such which enable or attract the application of the second proviso to sub-section (3) of section 34 as no such directions or findings are existing in this case. This last ground was subsequently given up at the hearing. Mr. Natu, the learned counsel for the department, raised some preliminary objections to the petition. He urged that the orders of the Appellate Tribunal and the Appellate Assistant Commissioner were not challenged by the petitioner in this petition, but only the notices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or before the 1st day of May in each year, requiring every person whose total income during the previous year exceeded the maximum amount, which is not chargeable to income-tax, to furnish return within the prescribed period. If a person does not file any return, then under sub-section (2) the Income-tax Officer can issue a notice to a person who, in his opinion, is liable to income-tax, to furnish the return of his income within the time specified in the notice. Section 23(1) gives power to the Income-tax Officer to make the assessment, if he is satisfied, without requiring the presence of the assessee or the production by him of any evidence, that the return made by the assessee under section 22 is correct and complete. Under sub-section (2) if the Income-tax Officer is not satisfied about the correctness or completeness of the return, then he can call upon the assessee to attend his office or to produce or cause to be produced any evidence in support of his return. Under sub-section (3) the Income-tax Officer on hearing such evidence, as may be produced before him, has to assess the total income of the assessee and determine the sum payable by him on the basis of such assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is powers to revise the order given in the proviso to that section. Section 33B empowers the Commissioner to call for and examine the record of any proceeding if he considers that any order passed therein by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue and after giving the assessee an opportunity of being heard to pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment and directing a fresh assessment. There is, however, a limit to his power which is specified in clause (b) to sub-section (2), namely, he cannot pass any order after the expiry of two years from the date of the order sought to be revised. The provisions of sub-section (3) to section 34 have already been reproduced by us above and the provisos to the said sub-section are reproduced below : " Provided that where a notice under clause (b) of sub-section (1) has been issued within the time therein limited, the assessment or reassessment to be made in pursuance of such notice may be made before the expiry of one year from the date of the service of the notice even if at the time of the assessment or re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer under section 23 and from this bar of limitation is excluded an order of assessment under section 23 to which clause (c) of sub-section (1) of 28 applies. This would show that the bar under section 34(3) applies to the assessment to be made by the Income-tax Officer under section 23 as it is the Income-tax Officer who makes the assessment. When the assessment made by the Income-tax Officer is challenged by the assessee, the Appellate Assistant Commissioner does not make an assessment, but only finds out as to whether the assessment made by the Income-tax Officer is correct and legal and if he finds that it is either not correct or legal in respect of the whole or any part of it, then he either sets aside the assessment or modifies it giving relief to the assessee. Similarly, when an appeal is taken to the Appellate Tribunal by the assessee he only finds out as to whether that part of the order of the Appellate Assistant Commissioner which is against the assessee is a correct order and passes suitable orders in respect thereof either maintaining the order of the Appellate Assistant Commissioner or gives the further relief to the assessee. Such orders by the Appellate Assistant C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l as the department could prefer appeals and if by the time the order is passed by the Income-tax Officer or the Appellate Assistant Commissioner, the period of 4 years has already elapsed, the right which has been given to the assessee or the department to challenge the orders of the Appellate Assistant Commissioner before the Tribunal would be an illusory right. This could not have been the intention of the Act. It could well be that the reasonable time limit had to be provided within which an assessment must be made by the Income-tax Officer so as not to keep the sword hanging on the assessee and avoid harassment to him. A limit of 4 years, therefore, has been prescribed for the Income-tax Officer to make the assessment which is the outer limit so far as the Income-tax Officer is concerned. If the whole process including the appeal to the Tribunal had to be concluded within a period of 4 years, then different limits would have been placed for the orders to be made by the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal so as to make the total period of 4 years. It cannot be expected that the appeals before the Appellate Assistant Commissioner and the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not make a fresh or additional assessment, but were only considering the validity or the correctness of the order made by the Income-tax Officer and to such an appeal, there could not be any limitation. In my view, the decision of the Supreme Court in State of Orissa v. Debaki Debi, referred to above, has no application to the facts of the present case. The question then arises is what kind of assessment is made by the Income-tax Officer when proceedings are remanded either by the Appellate Income-tax Commissioner or the Tribunal to the Income-tax Officer. Are they proceedings under section 23, or section 34, or any other kind of proceedings? The Income-tax Officer having already made an assessment, it could not be said that he is making the assessment again on remand by the appellate authority. It may not, therefore, fall under section 23 of the Act and such a further proceeding on remand by the Income-tax Officer could be under section 34 or some other kind of assessment. It could be a reassessment as contemplated by section 34, but whether it is a reassessment under section 34 or whether it is some other kind of assessment, that would not make any difference in view of lifting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direction, that would constitute an information under section 34(1)(b) of the Act. The decision of the Supreme Court in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax shows that the information in section 34(1)(b) includes information as to facts as well as information as to the state of the law and finding or direction given by an appellate authority either on the question of fact or of law would be an information to the Income-tax Officer under the provisions of section 34(1)(b). Section 34(1)(b), however, puts a bar of limitation and for proceedings under that provision a notice has to be issued within a period of 4 years of the end of that year and the assessment has to be made before the expiry of one year from the date of the service of the notice. Apparently if the order of the appellate authority remanding the matter to the Income-tax Officer is itself passed after a period of 4 years of the end of that year, no notice could ever be issued to the assessee under section 34(1)(b) of the Act and no effect could be given to the findings or directions given by the appellate authority. In order to remove this anomalous position, it appears that the second proviso below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23(2), they could be taken to be as notices under section 34 as they were issued in consequence of the order passed by the appellate authority and if the notices are so understood, then the second proviso to section 34 would apply with all force and the bar of limitation under section 34(3) or section 34(1)(b) could not be pleaded. Such a situation arose in the Allahabad High Court in a case, Lakshman Prakash v. Commissioner of Income-tax. Assessment was made for the assessment years 1940-41 to 1943-44 against a Hindu undivided family of which A was a member. For the assessment year 1944-45, A submitted a return in the status of an individual. The Income-tax Officer assessed the income as that of a Hindu undivided family. The Hindu undivided family appealed and contended that the assessment was invalid as the income did not belong to it but belonged to A as an individual. The Appellate Assistant Commissioner directed an enquiry to be made as to whether the income belonged to the family or to A as an individual. The Income-tax Officer made an enquiry and found that the income did not belong to the family and by order dated 24th, January, 1952, assessed the income as that of A as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction has been given has submitted himself to the procedure under the Income-tax Act, and has gone through the whole procedure, whereas in respect of the other assessees they have escaped assessment on account of their negligence or in advertence or omission on the part of the Income-tax Officer and are in a more favourable position. The question regarding the vires of the second proviso below section 34(3) of the Income-tax Act was raised before the Supreme Court in two decisions, viz., S. C. Prashar v. Vasantsen Dwarkadas and Commissioner of Income-tax v. Sardar Lakhmir Singh. Both these cases were decided by the same Bench of five judges on the same day. In the first case the majority judgments were delivered by Mr. Justice S. K. Das, Mr. Justice J. L. Kapur and Mr. Justice A. K. Sarkar and the minority judgment was delivered by Mr. Justice Hidayatullah, as he then was, on behalf of himself and Mr. Justice Raghubar Dayal. Mr. Justice S. K. Das and Mr. Justice Kapur took the view that the second proviso to section 34(3) is unconstitutional whereas Mr. Justice Hidayatullah (now Chief Justice) and Mr. Justice Raghubar Dayal took the contrary view. Mr. Justice Sarkar did not dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the said year on a partner or partners of the firm, member or members of the Hindu undivided family or the individual, as the case may be, and in such cases, though the latter are not eo nomine parties to the appeal, their assessments depend upon the assessments on the former. Thus, it would appear that the unconstitutionality of the second proviso to section 34(3) was confined only to the persons who are not intimately connected with the assessments and not with respect to the assessee or person intimately connected with the assessment under appeal. The minority judgment was given by Mr. Justice Mudholkar in which he considered the earlier Supreme Court decisions cited above, as well as the decision in Suraj Mall Mohta & Co. v. A. V. Visvanatha Sastri. The learned judge, while dealing with the question, made the following observations, which are relevant : " No doubt, persons whose income have escaped assessment, and the fact that they have escaped assessment has not been discovered till after the lapse of eight years from the year in which they could have been assessed to tax on such income can be placed in one class. But surely it does not follow that even in that class t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 34(3), has observed as under : " The learned counsel for the petitioner relies upon S. C. Prashar v. Vasantsen Dwarkadas to support his contention that the proviso to section 34(3) is unconstitutional as it is hit by article 14 of the Constitution. A perusal of that decision seems to us to indicate that the proviso has been held to be unconstitutional only so far as third parties are concerned but has been held valid with respect to persons who are parties to the proceedings before the income-tax authorities. " The Madras High Court in M. Ct. Muthuraman v. Second Income-tax Officer, Madras has explained the Supreme Court decisions in S. C. Prashar v. Vasantsen Dwarkadas and Commissioner of Income-tax v. Sardar Lakhmir Singh, referred to above, in these words : ". . .the majority of the learned judges of the Supreme Court were considering the question whether the proviso should be struck down as unconstitutional as it is not supported by the well-known theory of reasonable classification. It is, however, to be remembered that in S. C. Prashar v. Vasantsen Dwarkadas the majority were mainly concerned in applying the principle and text of the proviso to any person, meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econd proviso to section 34(3) was wholly invalid and is on that basis that it was held that the case of Vasantsen Dwarkadas had declared that the second proviso was wholly ultra vires. Subsequent decision of the Supreme Court in Income-tax Officer, A-Ward, Sitapur v. Murlidhar Bhagwandas, however, makes it clear that the law declared by the case of Vasantsen Dwarkadas is that the second proviso was ultra vires in so far as it affected persons other than those who were parties to the proceedings in which the order or finding was made. It appears to us, therefore, that the view expressed in Mahendra Bhawanji Thakar v. S. P. Pande may be incorrect and may not be capable of being allowed to prevail in view of the subsequent decision of the Supreme Court in Income-tax Officer, Sitapur v. Murlidar Bhgawan Das, which makes it clear that the extent of the ultra vires nature of the second proviso to section 34(3) is only so far as it affects persons other than parties to the proceedings." The question, therefore, of the constitutionality of the second proviso to section 34(3) has now been settled by the Supreme Court and the said proviso could not be held to be ultra vires as contended by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... differentia for allowing the assessment to be done after the expiry of that statutory period by means of an order of remand, except by resorting to the provisions of section 34(1) in a proper case ; 2. The orders of remand in the present case are not accompanied by any " finding or direction " within the terms of the second proviso so as to attract the applicability of that proviso ; and 3. Once the statutory period of four years elapses in the course of proceedings by way of appeal, etc., it is not possible to reach the assessee under the second proviso, except through the machinery of section 34(1). Though Mr. Bobde formulated the three propositions stated above, it must be stated that, with his characteristic fairness, he did not press the second proposition in view of the decision of the Supreme Court in the case of Income-tax Officer, Sitapur v. Murlidhar Bhagwan Das which makes it clear that an order of remand would itself fall within the term " direction " within the terms of the second proviso. The said point must, therefore, be treated as abandoned by the petitioners. As far as the third proposition formulated by Mr. Bobde is concerned, Mr. Bobde has conceded that if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-section (3) of section 34, because the term " assessment " takes in orders made in appeal or revision or on reference. This premise is seriously disputed by Mr. Natu on behalf of the revenue. Mr. Natu has submitted that the statutory period of four years laid down in section 34(3) is applicable only to the first order of assessment made by the Income-tax Officer under section 23, and to a reassessment under section 34(1) in respect of escapement of income, but does not apply to any subsequent stage of the proceedings. According to Mr. Natu, as the substantive portion of sub-section (3) of section 34 does not apply to proceedings by way of appeal, revision or reference, no question of lifting the ban under the secon proviso arises at all in respect of a fresh assessment made in consequence of a finding or direction given in appeal or revision or on a reference. The learned advocates on both sides have stated that the point is one which is not directly covered by authority. In support of that contention, Mr. Natu has taken us in detail through the various sections of the Indian Income-tax Act, 1922, and the different expressions used therein, viz., " assessment ", " provisional as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this Act " which would make the revisional powers of the Commissioner under that section subject to the statutory period of four years laid down in section 34(3). Mr. Natu has pointed out that those words are not to be found in section 33B where the Commissioner seeks to exercise revisional powers to protect the interests of the revenue. In my opinion, the contention of Mr. Natu that the period of limitation laid down in the substantive portion of section 34(3) applied only (a) to the first order of assessment by the Income-tax Officer under section 23, and (b) to a reassessment by the Income-tax Officer on account of escaped income under section 34, is not correct. The scheme of the Act on which Mr. Natu has relied only shows that section 34(3) does not apply to proceedings by way of appeal, revision or reference. It does not show that the terms of section 34(3) would not cover an assessment or reassessment by the Income-tax Officer in consequence of a finding or direction given in appeal or revision or on reference. In my opinion, the substantive portion of sub-section (3) of section 34 would have applied to an assessment or reassessment in consequence of a finding or direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that case, by the revising authority, must, therefore, be held to be the orders passed under section 12, as well as under section 23, which lays down the powers of such authority, and that, consequently, the period of limitation prescribed in the second proviso to section 12(6) would in terms become applicable. In accordance with the view of the majority of the judges, the decision of the High Court quashing the orders of assessment passed in the revision was, therefore, confirmed and the appeals before the Supreme Court dismissed. I am unable to read the decision in Debika Debis's case as being of any assistance for the purpose of construing the provisions of the Income-tax Act. The Supreme Court decided the question before it in that case expressly on a review of the provisions of the Orissa Sales Tax Act. It would, in my opinion, be dangerous to apply that decision in regard to the construction of the provisions of the Income-tax Act, 1961, as urged by Mr. Bobde. Mr. Bobde also relied upon another decision of the Supreme Court, and that was the decision in the case of A. N. Lakshman Shenoy v. Income-tax Officer, Ernakulam, in regard to what have been referred to in the repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment " or even a " fresh assessment ". In my opinion, though the word " assessment " has to be understood in each section with reference to the context in which it has been used as laid down by the Supreme Court in Shenoy's case, it must carry the same meaning in the same section. It cannot mean one thing in section 34(1) and another in section 34(3), or in the second proviso thereto. The ratio of the judgment of the Supreme Court in Shenoy's case is that as the words " assessment " and " reassessment " occurred in juxtaposition in section 34, a somewhat restricted meaning had to be given to the otherwise comprehensive expression " assessment " which would distinguish it from " reassessment " or a " fresh assessment ". It would, in my opinion, follow that the terms " assessment " and " reassessment " between them cover every kind of taxing order. That is the only conclusion to which the observations of the Supreme Court in Shenoy's case can lead us. The next decision relied upon by Mr. Bobde was the decision of the Supreme Court in the case of Thomas v. Vasant Hiralal Shah, but all that the said decision lays down is that the second proviso governs the whole of section 34(1) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to Rs. 88,737 was brought to tax for the assessment year 1949-50. The assessee appealed and the Appellate Assistant Commissioner held that the income was received in the previous accounting year and directed that the amount should be deleted from the assessment for the year 1949-50 and included in the assessment for the year 1948-49. Pursuant to that direction, the Income-tax Officer initiated reassessment proceedings under section 34(1) in respect of the year 1948-49 and served a notice on the assessee on 5th December, 1957. It was common ground that the said notice was beyond the time prescribed by section 34(1), and the question which arose was whether the second proviso to section 34(3) applied and saved the notice from being time-barred. The judgment of the majority was delivered by Subba Rao J. and it was held that the second proviso would not save the time limit prescribed under sub-section (1) of section 34 of the Act in respect of escaped assessment of a year other than that which was a subject matter of the appeal or the revision, as the case might be, and the notice in that case was clearly barred by limitation and had to be quashed, as held by the High Court, and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so as referring only to the directions which the Appellate Assistant Commissioner or other tribunals could issue under the powers conferred on him or them under the respective sections. The ratio of the decision of the Supreme Court in Murlidhar Bhagwan Das's case therefore, is that the second proviso lifts the bar of limitation only in respect of the assessment year in question in the appeal or revision. The said decision is, therefore, not directly applicable to the present case. The Supreme Court has, however, discussed the historical background of section 34 and has analysed the provisions thereof in a manner which is of assistance in the task of construing the second proviso in the present case. Mr. Natu has relied on the observation of the Supreme Court in the said case mentioned above that, to a case to which the second proviso applies, there is no period of limitation either for initiating proceedings under section 34 or for completing the assessment commenced either under section 23 or under section 34(1), as showing that the said proviso would lift the bar of limitation in the present case, and that it is not true to say that the appellate authority could not have made th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er under section 23 and also provided a period of limitation for making an order of assessment or reassessment in cases of escaped income under section 34, felt the necessity of engrafting an exception on the operation of that rule of limitation, because it must have been felt that but for the exception enacted under the proviso, the period of limitation of four years would have operated in every case, even when the order was made under section 23 or under section 34 after there had been an order or direction from a higher authority. The view taken was that the position properly analysed was that in a case of assessment under section 23 or an order of assessment or reassessment under section 34, a situation might arise when the Income-tax Officer might have to pass orders once again under those very sections and, by the time he sat down to do so, the period of limitation of four years laid down in section 34(3) might well have already elapsed. It was pointed out in the said judgment that it being not the intention of the legislature in any such case to allow the possibility of such a contention being raised, the legislature engrafted the second proviso to sub-section (3) of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be distinguished from a reassessment ". It is, however, not necessary for us for the purpose of this case to determine what is the distinction between the terms " assessment " and " reassessment " inter se, as used in section 34, in so far as it follows from the observations of the Supreme Court in Shenoy's case that those two terms, between them, cover all taxing orders. The question that falls for decision in the present case is, do the terms " assessment " and " reassessment " apply only to taxing orders passed by the original taxing authority, viz., the Income-tax Officer, or do they also include the whole process of taxation by the higher appellate, revisional and reference authorities also ? The authorities discussed above do not throw any light on that specific question with the result that we are relegated to a construction of section 34 in the context of the other relevant sections of the Act. Having considered the scheme of the Act and the various sections which were pointed out to us in the course of the arguments in the present case, I have come to the conclusion that it is only the Income-tax Officer who makes the " assessment " or " reassessment ", and that what the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the expiry of the period of four years provided for in the substantive portion of sub-section (3) of section 34 must be rejected. Mr. Bobde's further contention that as the appellate, revisional or reference authorities could not themselves have made the assessment after the expiry of four years, as contended for by him, there is no intelligible differentia for allowing the assessment to be done after the expiry of that period by means of an order of remand, except by resorting to the provisions of section 34(1) in a proper case, and that the second proviso to section 34(3) is, therefore, ultra vires article 14 of the Constitution, must also be rejected. Towards the end of his argument, Mr. Bobde formulated, what may be termed, a subsidiary contention that if the term " assessment " takes in all stages of appeal, revision and reference as he has contended, the orders of remand made in the present case as a result of which the notices dated April 6, 1967, which are sought to be impugned by the petitioners have been issued by the Income-tax Officer are bad irrespective of the question of the vires of the second proviso to section 34(3). But for the question of vires raised be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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