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TMI Blog2011 (6) TMI 563X X X X Extracts X X X X X X X X Extracts X X X X ..... stock also must necessarily be valued in the same manner. The other method is the 'net method' in which the raw material purchased is valued at the actual cost, that is the actual purchase price and, on this, Modvat credit would be available. If this method is to be adopted, then uniformly the same method must be adopted while valuing the unconsumed stock at the end of the year. Whichever method one adopts, the result would be the same, following the judgment of the Hon'ble Supreme Court in the case of Indo Nippon Chemicals Co. Ltd. (2003 - TMI - 6119 - SUPREME Court) , order of the CIT(A) upheld and appeal of the Revenue dismissed. Addition on account of excise duty payable on finished goods not included in the valuation of closing stock - though the assessee has debited the excise duty on unsold closing stock in its profit and loss account, but has not taken the same in the valuation of the closing stock – Held that:- in the case of Food Specialities Ltd. (1990 - TMI - 63941 - ITAT DELHI-C) was relied upon to adjudicate upon the question whether excise duty formed part of the cost of manufacture/production and was hence, includible in the figure of closing stock to the extent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee by following the decision of the Tribunal in the case of Sudarshan Chemical Industries Ltd. v. Dy. CIT [1997] 60 ITD 629 (Pune). It was further pointed out by the learned Authorised Representative of the assessee that the decision of the Tribunal in the case of Sudarshan Chemical Industries Ltd. (supra) had been affirmed by the Hon'ble Bombay High Court in the case of CIT v. Sudarshan Chemical Industries Ltd. [2000] 245 ITR 769. The learned Departmental Representative Shri G.S. Singh also accepted the same. This being so, this part of ground of appeal of the assessees which relates to inclusion of excise duty, sales tax payable and interest in the total turnover of the assessee is decided in favour of the assessee and against the revenue. 4. The other part of the ground of appeal relates to sale of scrap. The contention of the assessee is that they cannot form part of the turnover of the assessee. For this, the learned Authorised Representative of the assessee, has placed reliance on the decision of the Tribunal in the case of Eagle Flask Industries Ltd. v. Dy. CIT [2000] 72 ITD 455 (Pune). The learned Departmental Representative also accepted the same but argued that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a non obstante clause, but it is a non obstante clause vis-a-vis sub-section (l) and sub-section (3) of Sec. 37 only. If any expenditure or allowance is allowable under other sections of the Income-tax Act, 1961, the allowance cannot be withdrawn or denied to the assessee because of the prohibitory provisions in Sec.37(4) of the Income-tax Act, 1961. Therefore, the assessee will be entitled to depreciation on the premises used as guest house." Hence, it was his argument that since the Tribunal has not considered these judgments of the Bombay High Court while deciding the issue, in the present appeal, the Bench should take these decisions into consideration and decide the issue in favour of the assessee. On the other hard, Mr. Singh the learned Departmental Representative argued that as the issues are covered in favour of the Revenue by the decisions of this Tribunal, therefore, maintaining the consistency of the view, the same should be decided in favour of the Revenue. 7. We have considered the rival submissions and gone through the provisions of Section 37(4). We find that clause (ii) therein reads as under: "37(4)(ii) in relation to the assessment year commencing on the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous year of the "writing off", the A.O. has to take necessary action u/s. 36(2)(iv) and rectify the assessment of the previous year wherein in his opinion the debt became irrecoverable. If on the other hand, the A.O. comes to a finding that the debt becomes bad in later previous year he shall give the deduction when he makes the assessment for such relevant previous year. In any case, the A.O. has to give a finding as to the year in which the debt has become bad or irrecoverable. 6.1 In the present case the A.O. has not carried out this imperative exercise. Prima facie it is seen that the amounts shown as bad are premature claims since most of the invoices against which the debt is claimed as bad are of the current financial year. However, in the fitness o things, the A.O. should Identify the year in which these amounts are considered by him to have really become bad and allow the deduction accordingly in that previous year. This exercise should not be very cumbersome since it is now more than 3 years since the claims have been written off and if the marketing division has been persuasive and consistent in its recoveries, then the exact position should have crystallize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 of the paper book it is observed that the assessee has debited Rs. 41.59 lakhs under the head "provision for Bad Debts" and credited Rs. 45.13 lakhs under that head and thus, credited net amount of Rs. 3.54 lakhs under this head and reduced the miscellaneous expenses by amount of this Rs. 3.54 lakhs. From the details of Rs. 45.13 lakhs as given by the assessee in the above page, it appears that an amount of Rs. 25.25 lakhs was disallowed in the assessment of earlier years and Rs. 19.88 lakhs was allowed as deduction to the assessee in the earlier years. From the order of the assessment (pages 16 and 17) we find that the A.O. has duly allowed deduction of Rs. 25.25 lakhs in computing the taxable income of the year under consideration which were disallowed and taxed in the earlier years and has brought to tax only Rs. 19.88 lakhs out of Rs. 45.13 lakhs as because this amount was allowed as deduction to the assessee in the earlier years. Thus, we find that the assessee has debited Rs. 41.59 lakhs as provision for bad debts during the year under appeal and the learned Authorised Representative, Sri J.D. Mistry has erroneously represented before the Bench that there was no deduction c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of raw-materials and value of closing stock should reflect the full purchase price inclusive of excise duty paid ; (b) Only the taxes which are paid in cash should be claimed as charged on profits and should be allowed as, deduction ; (c) MODVAT registers do not/cannot impinge with charge on profits; they are only instruments to determine cash out-go on account of excise duty and they should be used only for that purpose; (d) Income determined in consonance with (a), (b) and (c) above alone is the correct income, which is subject to charge of income tax. 12. In appeal, the CIT(A) has held that the correct method is the one held by the Bombay Tribunal in S.H. Kelkar Co. which is as follows : (i) to debit purchase cost inclusive of excise duty ; (ii) to debit gross excise duty actually payable ; (iii) determining the value of closing stock inclusive of excise duty since that has been taken as 'the purchase cost. (iv) crediting to profit and loss account with MODVAT credit availed of. The CIT(A) further observed that the A.O. is wrong in stressing that the earlier accounting procedure, where cost was inclusive of excise duty and which impacted on the closing stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presentative that the profit and loss account would appear as under : Unit Rate Amount Unit Rate Amount To purchase of raw materials 100 12 1200 By sales 60 15 900 Less : Stock of raw-materials 40 12 480 720 To excise duty 60 3 180 To G.P. NIL 900 900 It has been emphasized that with such a method of accounting, the profit of Rs. 120/-, which is reflected in the illustration of the ICAI (supra), would disappear to a NIL figure. 14. The A.O.'s conclusion on pages 5 to 8 that the method of accounting suggested by the ICAI is not valid is beyond reason because he has compared it with a case where there is no or NIL rate of duty on the finished goods. The comparison is wholly inapposite. There can be no comparison between a case where MODVAT cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the MODVAT are not to be considered for financial accounting is a complete contradiction not only with the mercantile system of accounting followed by the Company but also with the basis accounting principles. The A.O. has failed to note that if the amount of MODVAT credit availed is not to be claimed as excise duty payment, it will still have to be claimed as part of cost of purchase of raw materials and will be debited to the profit and loss account. In effect, therefore, there will be no impact on the taxable income for the year. 18. The amount of MODVAT credit availed is treated as part of the excise duty and claimed as a deduction on account of excise duty payment and not included in the cost of raw material which is accounted for net of MODVAT. There is no double adjustment of MODVAT credit in the accounts. 19. The learned Authorised Representative of the assessee further argued that the method of accounting which is followed consistently for the last 20 years since 1979 upto the assessment year 1999-2000 when the method was changed because of introduction of Section 145A in the Income-tax Act, 1961 and accepted by the department has also been approved by the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed goods which was not included in the value of the closing stock of such goods. It was explained that the amount was excluded from the valuation of closing inventory because excise duty on finished goods is not a direct cost of manufacturing. It was further submitted by the assessee that its claim was supported by the consolidated order of decision of the Special Bench of the Delhi Tribunal, in the case of ITO v. Food Specialities Ltd. [1994] 49 ITD 21 and Indian Communication Network (P.) Ltd. v. IAC [1994] 49 ITD 56. The A.O. did not accept the explanation and the contention of the assessee and observed that (i) the method adopted by the assessee of not including the excise duty in valuation of closing stock is against the standard accounting practice provided by the institute of Chartered Accountants of India and (ii) the above recognised practice has been mutilated by quoting case of Saraswati Industrial Syndicate Ltd. v. Union of India AIR 1975 SC 460, in a totally out of context. He therefore, held that the claim of excise duty was not allowable and the same was added back to the returned income. 22. In appeal, the CIT(A) has examined whether the value of closing stock o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ludible in the valuation of stock-in-trade. This proposition has not been dis-approved by the Hon'ble Supreme Court in British Paints Ltd. Thus, the CIT(A) held that the assessee's method of accounting of valuation of stock-in-trade by excluding the proportionate excise duty liability is correct, particularly in view of the Hon'ble Supreme Court decision in Saraswati Industrial Syndicate Ltd. (supra). Further, the CIT(A) has also examined the proposition that if the inclusion of excise duty in the valuation of stock-in-trade is for any reason to be sustained, the assessee has claimed that deduction of the amount of excise duty paid before filing of the return should be allowed as a deduction under Section 43B to negate the addition made on account of excise duty in the valuation of closing stock. However, in the circumstances of the case, it is needless to go into the alternative claim of the assessee u/s. 43B since the valuation of closing stock exclusive of excise duty has been correctly made as per the recognised principles of accounting. The CIT(A) observed that furthermore, this method of accounting has been approved by the Special Bench of Delhi Tribunal and as pointed out by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ratio of the decision of the Tribunal in their own case, for the assessment year 1976-77, and the decision in CIT v. Ahmedabad New Cotton Mills Co. Ltd., the opening stock also be correspondingly revalued. (g) No profit arises from the valuation of stock on a consistent basis. There is no change in the method of valuation of stock and the opening and closing inventories are valued on the same basis. (h) The assessee values the stock of finished goods at the lower of cost or market. The cost is determined by applying the principle of direct costing. In other words, expenses, which are not in the nature of cost of manufacturing or production, are not taken into account. The decision of the Hon'ble Supreme Court in British Paints India Ltd.'s case (supra) does not, in any way, contradict the assessee's submissions. This decision has also been considered by the Special Bench of the Tribunal and on page 56 it is confirmed that the Hon'ble Supreme Court has not disapproved of the method of direct costing. (i) The A.O. has added the sum, under the mis-conception that the amount was claimed in addition to debiting the amount in the profit and loss account as the same-formed part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) and thus, this ground of appeal of the Revenue is dismissed. 26. The fourth ground of appeal relates to the direction of the learned CIT(A) to tax the net Interest received from the Income-tax Department. During the year under appeal, the assessee received interest of Rs. 45,90,876 from the Income-tax Department and paid interest of Rs. l,37,221 to the department. The assessee's claim is that only net interest should be charged to tax end for this, reliance is placed on the decision of Delhi Tribunal in the case of R.N. Aggarwal v. ITO [IT Appeal No. 3913 3914 (Delhi) 1980 620/(Delhi)/1981, dated 21-8-1981] and decision of the Bombay Tribunal in the case of Cyanamid India Ltd. v. ITO [IT Appeal No. 4561 (Bom.) of 1982 assessment year 1978-79, dated 23-5-1984]. The A.O. rejected the claim on the ground that the interest charged on late payment of tax by the department is not the business expenses for the purpose of computing the income. In appeal, the CIT(A) after considering the submissions of the assessee, directed the A.O. to tax only net interest in view of the Tribunal decisions referred to by the assessee. Being aggrieved, the Revenue is in appeal before us. 27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Briefly the facts to this ground of appeal as discussed by the A.O at page 15 of the assessment order are that during the course of examination it was found by the A.O. that the assessee has credited only the net interest received from the income-tax Department i.e. the interest paid to the Income-tax Department was deducted from the interest received on Income-tax refund. This claim was made by the assessee on the basis of two decisions of the Tribunal. The A.O after rejecting the assessee's claim was of the view that interest charged on late payment of tax by the Department is not a business expenses deductible for the purpose of computing income under the I.T Act and, therefore, interest charged by the Department Rs.1,37,225/- was added in the income of the assessee. On first appeal before the CIT(A) the assessee has reiterated the same submissions and in support of it reliance was placed on the decisions of the Tribunal in the case of R.N Aggarwal (supra), Delhi Bench and Cynamide (India) Ltd.'s case (supra). The CIT(A) after considering the submissions of the assessee vide finding recorded at para 9.3 of her order has directed the A.O to tax only the net interest in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received from the income-tax Department be assessed under the head "income from other sources" and even otherwise no such plea or claim was admitted by the Bench during the course of hearing. The deduction of interest paid to the Department was claimed solely on the ground that there can be only one account between the parties. However, the LD A/R of the assessee has failed to show that under which provision of law such deduction of interest is allowable, therefore, such accounting method, as claimed by the Ld. A/R of the assessee, is contrary to law and it cannot over-ride the provisions of income-tax Act as held by the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertiliser Ltd. v. CIT [1997] 227 ITR 172. 7. The Ld. A/R of the assessee has also failed to show any nexus between the interest received and payment of interest to the income-tax Department. Even under the head "Income from other sources" such deduction of interest paid to the Income-tax Department is not allowable deduction in view of the decision of the Hon'ble Supreme Court in the case of CIT v. Dr. V.P. Gpinathan [2001] 248 ITR 449 wherein it was held that (short note) " the interest tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. (supra) 11. In the case of Fenner (India) Ltd. v. CIT [1997] 223 ITR 738 (Mad.) it was held by the Hon'ble Madras High Court (short note) that - "Where tax which is due from the assessee is based on profits and gains of business or profession any interest payable for non-payment of such tax should also be considered as levied on the basis of such profits or gains. It cannot be allowed as a deduction." 12. In the case of Fenner (India) Ltd. v. CIT (Mad.) it was again held by the Hon'ble Madras High Court following its earlier decision in Fenner (India) Ltd.'s case (supra) that interest paid u/s 220(2) is not an allowable deduction against profit of company. 13. In the case of Orissa Cement Ltd. v. CIT [1993] 200 ITR 636 (Delhi) it was held by the Hon'ble Delhi High Court that the Interest payable under section 220 (2) of the Act, 1961 for delayed payment of a demand of Income-tax is not allowable as business expenditure under sections 28 and 37. 14. In the case of CIT v. Ghatkopar Estate Finance Corporation (P) Ltd. [1989] 177 ITR 222 it is held by the Hon'ble Bombay High Court that the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h great respect of the earlier decisions of the Tribunal as relied upon by the Ld A/R of the assessee are distinguishable and not applicable to the facts of the present case, I am, therefore, respectfully following the decisions of the Hon'ble Apex Court as referred to above, of the view that the interest paid on delayed amount of income-tax is not allowable deduction as business expenditure or otherwise under the I.T. Act as such payment of interest is inextricably connected with the assessee's tax liability which itself is not allowable as deduction and accordingly the ground No. 4 taken by the Revenue in ITA No. 119/PN/1996 for the assessment year 1992-93 is allowed. 19. In respect of other grounds in both the appeals except the ground No. 4 in the Revenue's appeal in I.T.A. No. 119/PN/1996 I fully agree with the order passed by the learned Accountant Member. ORDER UNDER SECTION 255(4) OF THE Income-tax Act, 1961 As there is a difference of opinion between the Members of the Bench we state the following point of difference and refer the same to the Hon'ble President Income-tax Appellate Tribunal for further necessary action as envisaged u/s 255(4) of the Income-tax Act: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Aggarwal v. ITO and that of Bombay Tribunal in the case of Cynamide (India) Ltd.; when in fact, the AO has rightly taxed the interest received by assessee of Rs. 45,90,876/- thereby rejecting the assessee's claim on the ground that the interest charged on late payment of tax by department is not a business expenditure." In respect of the aforesaid ground the learned Accountant Member who wrote the leading order understood the claim of the assessee to be that both the interest received and the interest paid should be set off against each other and only the net interest, if any, should be charged to tax. He accepted the contention of the assessee that between the two parties, namely, the assessee and the income tax department, there can be only one account and on this basis the interest paid and the interest received by the assessee should be set off against each other and only the net interest should be brought to tax. 3. The learned Judicial Member was unable to agree with the view taken by the learned Accountant Member. He found that the claim of the assessee was that only the net interest should be charged to tax. He however proceeded to observe that the interest was claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s inextricably connected with the assessee's tax liability which itself is not allowable as a deduction. In this view of the matter he allowed the department's Ground No. 4, differing with the learned Accountant Member. 5. The reference was argued at great length by both the sides. The principal contentions of the learned CIT DR are as under: - (a) The principle of netting the interest paid and received cannot be accepted. (b) The receipt of interest is taxable but the payment of the interest is not allowable as a deduction as there is no provision in the Income Tax Act. (c) The principle of netting has to yield in any case to the statutory provisions. (d) It may be that so far as the assessee is concerned the interest is paid to and received from the income tax department. However, the income tax department does not maintain any ledger account for any assessee. The entries are made only in the demand and collection register on the basis of the orders passed by the Assessing Officer. (e) The rule of netting was held inapplicable in such cases by the Supreme Court in the case of Dr V.P. Gopinathan (supra). (f) Income tax payable and refunds receivable can be adjusted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case. He also pointed out that the order of the Gauhati Bench was not put to the assessee for rebuttal by the Bench. The learned counsel also drew my attention to the fact that the question framed by the learned Judicial Member actually does not arise out of the proceedings nor is the ground of appeal filed by the department clear, nor is the decision of the CIT(A) on the point. 7. Mr Mistri also took me through the judgment of the Hon'ble Bombay High Court in the case of Aruna Mills Ltd. v. CIT [1957] 31 ITR 153 and explained how that decision indirectly supported his case that both the interest received and paid should be adjusted against each other and only the net, if any, should be assessed. I will refer to this decision later. According to the learned counsel for the assessee, it is not a question of claiming deduction in respect of the interest paid against the interest received, but it is a question of assessing the income that is properly to be taxed in the assessee's hands, on the principle of netting. He reiterated that where the assessee has a single account with the income tax department and receives and pays income tax refunds and taxes respectively, irresp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Cynamide (India) Ltd. (supra); according to which only the net amount of interest received from the department was taxable. The CIT(A) dealt with the issue in paragraph 9 of his order. He has accepted the assessee's submission in view of the orders of the Tribunal cited by the assessee. In Ground No. 4 taken before the Tribunal the department has challenged the finding of the CIT(A) by pointing out that the Assessing Officer was right in rejecting the assessee's claim on the ground that the interest charged by the department for late payment of tax was not business expenditure. The point of difference proposed by the learned Accountant Member highlights the issue whether it is the gross interest of Rs. 45,90,876/- that should be taxed or it is only the net interest of Rs. 44,53,655/- that is to be taxed, after adjusting the interest of Rs. 1,37,225/- paid by the assessee on late payment of income tax. The point of difference proposed by the learned Judicial Member highlights the deduction aspect of the interest paid. Thus both the Members have separately highlighted both the aspects of the issue which has to be decided by me. 10. The Assessing Officer has dealt with the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st each other. On this question there are two judgments, one of the Supreme Court in Dr V P Gopinathan (supra) and the other of the Bombay High Court in the case of Aruna Mills Ltd. (supra), both of which are against the assessee. In the case of Dr V P Gopinathan (supra), the assessee placed monies in a fixed deposit with the bank and earned interest. He took a loan from the bank on the security of the fixed deposit and paid interest on the loan. The interest received on the fixed deposit was more than the interest paid on the loan by Rs. 27,034/-. The assessee's case was that he should be taxed only on the difference of Rs. 27,034/- under the residuary head whereas the case of the revenue was that the entire interest received should be brought to tax without reducing the same by the interest paid. It was noticed by the Supreme Court that the learned counsel appearing for the assessee before the Tribunal had made it clear that the assessee's case did not rest upon the provisions of section 57(iii) of the Act, which provided for a deduction of the interest paid by the assessee for earning the interest income. In other words, it was not the contention of the assessee that he was payi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced on behalf of Aruna Mills Limited before the High Court was that the Court must look at the payment of interest by the assessee company and the receipt of interest by the assessee company as a single indivisible transaction and when it is so looked, the transaction should be held to have resulted only in the company receiving the excess of the interest received over the interest paid and only such excess would be liable to tax. It was further argued that it was not proper to sever the transaction, i.e. to tax the interest received and not to allow any credit for the amount of interest paid. Dealing with this argument, the Hon'ble Bombay High Court held that in their opinion there was no relationship whatever between the receipt of interest by the assessee company and the payment of interest under the provisions relating to payment of advance tax. It was pointed out that it was difficult to understand what connection there is between the advance tax paid by the assessee by his discharging the statutory obligation and receiving the interest, and the failure of the assessee to make that statutory advance. It was held that in the first case the assessee was being paid interest for m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of the Supreme Court in the case of Dr V P Gopinathan (supra) and that of the Bombay High Court in the case of Aruna Mills Limited (supra) are against the assessee. 16. In view of the above legal position, I am unable to give effect to the order of the Delhi Bench of the Tribunal in the case of R N Aggarwal (supra) and the order of the Bombay Bench of the Tribunal in the case of Cynamide India Ltd. (supra). In this case (order dated 23.05.1984), the Tribunal accepted the assessee's submission that the interest received from the income tax department and the interest paid to the income tax department should be adjusted against each other and only the net interest received can be brought to tax as income. In the light of the judgments in Dr V P Gopinathan's case (supra) and Aruna Mills Ltd.'s (supra), I am unable to give effect to the orders of the Tribunal. 17. The learned counsel for the assessee was at pains to point out that the judgment of the Hon'ble Bombay High Court in Aruna Mills Ltd.'s case (supra) should not be read or understood as deciding the matter against the assessee since the law at that time was that the assessee could make advance payments of the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the gross interest of Rs 45,90,876/- received from the Income-tax Department and not merely on the net interest of Rs. 44,53,655/- remaining after the set off of the interest of Rs. 1,37,225/- paid to the Income-tax Department. The interest payment has also not been held to be deductible from interest received in order to arrive at the assessable income in respect of interest received from the Income-tax Department. In this manner, as per the majority view, the Ground of Appeal No. 4 of the Revenue is allowed. In order to appreciate the detailed reasoning in coming to such conclusion, the orders of the Members constituting the original Division Bench as also the order of the Hon'ble President constituting Third Member dated 02.06.2011 are being made as Annexure "A-1", "A-2" and "A-3" respectively to this order. 4. In so far as the other Grounds raised in the respective Cross appeals are concerned, the same are disposed off in the light of the order of the Members constituting original Division Bench, which are enclosed as Annexures A-1, A-2 respectively. 5. Resultantly, the captioned appeals of the assessee as well as of the Revenue are partly allowed. - - TaxT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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