Gujarat High Court
Principal Commissioner Of Income Tax – 1 … vs Gujarat Urja Vikas Nigam Ltd on 13 July, 2026
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 37 of 2025
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PRINCIPAL COMMISSIONER OF INCOME TAX - 1 VADODARA
Versus
GUJARAT URJA VIKAS NIGAM LTD
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Appearance:
MR RUTVIJ R PATEL, SENIOR STANDING COUNSEL for the Appellant(s)
No. 1
MR MANISH J SHAH(1320) for the Opponent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE PRANAV TRIVEDI
Date : 13/07/2026
ORAL ORDER
(PER : HONOURABLE MR. JUSTICE PRANAV TRIVEDI)
1 Heard learned Senior Standing Counsel Mr.Rutvij Patel
appearing for the appellant – Revenue and learned advocate
Mr.Manish Shah appearing for the assessee – respondent.
2 This tax appeal filed under Section 260A of the Income
Tax Act, 1961 (for short “the Act”) is directed against the
order dated 08.08.2024, passed by the Income Tax Appellate
Tribunal, Ahmedabad ‘A’ Bench (for short “the Tribunal”), in
ITA No. 223/Ahd/2022 for the Assessment Year 2017-18.
3 The revenue has proposed the following questions of law
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as substantial questions of law:
“i “Whether the Ld. Tribunal was justified in deleting the addition
of Rs.6,97,664/ made on account of disallowance of interest
expenditure which was attributable to capital work in progress and
was liable to be capitalized?”
ü. “Whether the Ld. ITAT was justified in relying on the decision of
the Hon’ble High Court of Gujarat in assessee’s own case in Tax
appeal No.63 of 2020, and holding that the adjustment made on
account of disallowance u/s 14A read with rule 8D of the Income
Tax Act, in computation of book profit u/s 115JB of the Income Tax
Act, is not as per law without appreciating that the amount
disallowable u/s 14A read with rule 8D of the Act is covered under
clause (f) of Explanation 1 to Section 115JB(2) and thus, the said
amount has to be added back while computing the book profits?”
4 The brief facts leading to the filing of the present tax
appeal are that the respondent – assessee is a Public Sector
Undertaking, inter alia engaged in the business of purchase,
sale and distribution of electricity.
4.1 The assessee filed its Return of Income for the
Assessment Year 2017-18 on 18.10.2017, declaring total
income of Rs.90,92,02,810/- after setting off brought forward
losses to the extent of Rs.75,45,22,135/-. The assessee had
also shown book profit under Section 115JB of the Act at
Rs.165,54,21,963/-.
4.2 The return filed by the assessee was taken up for
scrutiny assessment and after issuing various notices, the
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Assessing Officer passed Assessment Order under Section
143(3) of the Act on 23.12.2019 determining the total income
at Rs.319,47,55,443/- and book profit at Rs.308,27,86,868/-.
4.3 The Assessing Officer, while passing the aforesaid
Assessment Order, made the following disallowances:
(i) Disallowance under section 14A of the Act of
Rs.154,61,81,000/-
(ii) Interest capitalization of CWIP of Rs.6,97,664/-
(iii) Interest income on IT refund of Rs.10,49,47,929/-
(iv) Interest income treated as “other sources” of
Rs.13,36,99,000/-
(v) Dividend Income exempt under section 10(34/35) of
Rs.12,07,96,095/-
(vi) Adjustment in Book Profit under 115JB including the
disallowance u/s. 14A.
4.4 Being aggrieved by the Assessment Order passed under
Section 143(3) of the Act, the assessee preferred an appeal
before the Commissioner of Income Tax (Appeals). The
Commissioner of Income Tax (Appeals), partly allowed the
appeal of the assessee. Being aggrieved, appeals were
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preferred before the Tribunal by both, i.e. the assessee as well
as the Revenue. The Appellate Tribunal, by way of common
order dated 08.08.2024, partly allowed both the appeals
preferred by the revenue and the assessee. Being aggrieved
by the order of the Tribunal, the revenue has preferred the
present tax appeal proposing the substantial questions of law.
5 At the outset, learned Senior Standing Counsel Mr.Rutvij
Patel appearing for the appellant – revenue and learned
advocate Mr.Manish Shah appearing for the assessee, have
submitted that both the issues raised in this appeal are
covered by various pronouncements of this Court. It was
submitted that the first issue regarding addition of
Rs.6,97,664/- made on account of disallowance of interest
expenditure, is squarely covered by the decision of this Court
in the case of Commissioner of Income Tax-I vs. Amod
Stamping (P) Ltd., rendered in Tax Appeal Nos. 1058 to
1060 of 2013, reported in [2014] 45 taxmann.com 427
(Gujarat), wherein, this Court has observed as under:
“3.1 At the outset it is required to be noted that in each
assessment year the AO directed to make disallowance under
section 36(1)(iii) of the IT Act which has been deleted by the
learned ITAT by impugned judgement and order. At the outset it is
required to be noted that while deleting the disallowance made by
the AO under under section 36(1)(iii) of the IT Act, the learnedPage 4 of 14
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ITAT has relied upon the decision of the Bombay High Court in the
case of Reliance Utilities and Power Ltd. (Supra) and has
specifically observed that the interest free funds as on the date of
balancesheet were far in excess of investments as on 31.03.2004.
In para 23 [AY 200405] and while deleting the disallowance made
by the AO under section 36(1)(iii) of the IT Act, the learned ITAT
has observed as under.
“23. From the audited Balance Sheet as on 31.03.2004
placed on record it is seen that as on 31.03.2004 the
investments of the Assessee are to the tune of Rs.5.82 crore
as compared to Rs.46,000/ in the immediately preceding
financial year meaning thereby that the investments to the
extent of Rs.5,82,28,953/ have been made during the year. It
is also seen from the Balance Sheet that the interest free
funds in the form of share capital, reserves and surplus and
unsecured loans as on 31.03.2004 was to the extent of
Rs.22.92 crore as against Rs.2.79 crore as on 31.03.2004
meaning thereby that there was an increase of Rs.20.13
crore in interest free funds. Thus it is seen that the interest
free funds as on the date of Balance Sheet were far in excess
of investments as on 31st March, 2004. In the case of
Reliance Utilities (Supra) the Hon. Bombay H.C. has held as
under:
“Held that if there were funds available both interest
free and overdraft and/or loans taken, then a
presumption would arise that investments would be
out of the interest free funds generated or available
with the company, if the interestfree funds were
sufficient to meet the investments”.
Considering the facts of the case and seen in the light
of the decision of Hon. Bombay H.C. (supra) and
respectfully following it, we are of the view that in the
present case a presumption can be made that
investment are out of interest free funds and,
therefore, the Assessing Officer was not justified in
making addition. We, therefore, direct the deletion of
addition, made by A.O. Thus this ground Assessee is
allowed.”
[3.2] Similar observations are made by the learned ITAT with
respect to the assessment years 200506 and 200607. In the case of
Reliance Utilities and Power Ltd. (Supra), the Bombay High Court
has held that if there are funds available both interest free and
overdraft and/or loans taken, then a presumption would arise that
investments would be out of the interest free funds generated or
available with the company, if the interest free funds were
sufficient to meet the investments and therefore, interest was
deductible. Similar view has been taken by the Division Bench of
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this Court in the case of Commissioner of Income Tax vs. Gujarat
State Fertilizers and Chemicals Ltd. reported in [2013] 358 ITR
323 [Guj]. Applying the ratio/law laid down by the Bombay High
Court in the case of Reliance Utilities and Power Ltd. (Supra) as
well as Division Bench of this Court in the case of Gujarat State
Fertilizers and Chemicals Ltd. (Supra) to the facts of the case on
hand and when it has been found that the assessee was having
interestfree funds far in excess of investments and therefore, it can
be said that the investments are made out of interest free funds
and therefore, the AO was not justified in making additions and/or
making disallowance under section 36(1)(iii) of the IT Act. Under
the circumstances, no error and/or illegality has been committed
by the learned ITAT in deleting the disallowance made by the AO
under section 36(1)(iii) of the IT Act. No question of law much less
substantial question of law arise with respect to deletion of the
disallowance made by the AO under section 36(1)(iii) of the IT Act.”
5.1 The first question of law raised in this appeal, therefore,
being of the same nature, is now answered by this Court.
Further, in the present case, the Tribunal has given a
categorical finding of fact that assessee was having interest
free funds in excess of the investments and therefore, it can
be said that the investments were made out of interest free
funds. It was further observed that addition of Rs.6,97,664/-
was made by the Assessing Officer out of the interest
expenditure without appreciating the fact that the
expenditure was in respect of existing building which was
already put in use in earlier years and hence there was no
question of capitalization of any interest on account of the
same. The interest is added to cost of long term asset and is
included in depreciation of long term asset. Therefore, issue
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No.1 is categorically answered against the revenue in view of
the findings of fact by the Tribunal and decision of this Court
in Amod Stamping (supra).
5.2 The second issue is regarding adjustment made on
account of disallowance under Section 14A of the Act read
with Rule 8D of the Income Tax Rules, 1962 in computation of
book profit u/s 115JB of the Act. This issue is also now
answered by this Court and is no more res integra. This Court
in the case of The Principal Commissioner of Income Tax,
Vadodara-I vs. Gujarat Flurochemicals Ltd., in Tax
Appeal No. 28 of 2019 decided on 17.06.2019 has dismissed
the appeal filed by the revenue by holding as under:
“22 The third question proposed by the revenue is in context with
the adjustment made on account of the disallowance under
section14A in computing the book profit. In this context, the
findings recorded by the ITAT are as follows17 Next common issue involved in both years is, whether the
amount disallowed under section 14A read with rule 8D
deserves to be added back in the book profit for the purpose
of section 115JB. In other words, whether the additions
which have been confirmed by the Tribunal at Rs. 1.55
crores in the assessment year 201213 and Rs.75 lakhs in the
assessment year 201314, deserves to be added back in the
book profit computed for the purpose of section 115JB.
17.1 The ld. Counsel for the assessee at the very outset
contended that this issue is covered in favour of the assessee
by the judgment of Hon’ble Gujarat High Court in the case of
CIT Vs. Alembic Ltd in Tax Appeal No. 1249 of 2014 as well
as decision of Hon’ble Bombay High Court in the case of CIT
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of 2013. He placed on record copies both these decisions.
Apart from the above, he placed upon reliance Special Bench
decision of the ITAT in the case of CIT Vs. Vireet Investment
P. Ltd. 165 ITD 27 On the other hand, Id. CITDR relied upon
the order of DRP.
18. We have duly considered rival contentions and gone through
the record carefully. We find that ld DRP has relied upon the order
of the ITAT, Mumbai in the case of DCIT Vs. Viraj Profiles Ltd.,
(2016) 46 ITR (Trib) 0626 (Mum) and held that addition required to
be made in the book profit could be calculated as per Rule 8D of
the Income Tax Rules. The ld. DRP thereafter made reference to
decision of Hon’ble Delhi High Court in the case of CIT Vs. Geotze
India Ltd., 361 ITR 505. According to the ld. DRP, this decision has
been considered by the Special Bench in the case of Vireet
Investment P. Ltd. (supra) but placed reliance upon Hon’ble
Bombay High Court in the case of Vodafone India Services P. Ltd.
ACIT, 361 ITR 0531 (Bom) and held that DRP is not bound by the
ratio laid down by the Special Bench. The discussion made by the
DRP on this issue in the assessment year 2013-14 reads as under:
“10.3 In the case of Viraj Profiles Ltd. [2015] 64
taxmann.com 52 (Mum Trib), the Hon’ble Bench has
elaborately discussed the issue and held that the
disallowance is liable to be calculated as per Rule 8 D of the
Rules. After discussing the decisions which have also been
relied on by the appellant, the Hon’ble Bench has concluded
that, “In view of our foregoing discussion, we find no
infirmity with the orders of the AO and we hold that the AO
has rightly disallowed the expenditure of Rs.73,07,018/by
invoking the provisions of Section 14a of the Act read with
the Rule 8D of Income Tax Rules, 1962 for computing book
profit u/s.115JB(2) of the Act read with clause (f) to
Explanation 1 to clause 115JB(2) of the Act. We, therefore,
set aside the orders of the CIT(A) and restore the orders of
the AO We order accordingly. In the case of CIT (Central-II)
Vs. Goetze (India) Limited, the Hon’ble Delhi High Court has
in ITA No.1179/2010 vide order dated 09.12.2013, held that
the disallowance u/s 14A is to be taken into consideration for
the purposes of calculating book profits u/s 115JB. The
relevant paras of the judgment are reproduced below.
“36. By order dated 16 May, 2012, the following substantial
questions of law were framed in the present appeals.”
(i) Whether the Income Tax Appellate Tribunal was right in
holding that while computing book profit under Section
115JA (sic. Section 115JB) of the Income Tax Act, 1961, no
disallowance under Section 14A was required to be made?
Learned counsel for the respondents-assessee, during the
course of hearing, has fairly conceded that the first question
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has to be answered in favour of the Revenue and against the
assessee in view of specific provisions in the Explanation 1
below Section 115JB(2) clause (f).
The Assessing Officer it is stated had made an addition of Rs
88,292/ to the book profits towards expenditure incurred
having nexus with dividend income, which were exempt
under Section 10(33) Recording the said statement, the first
question is answered in favour of the appellant-Revenue and
against the respondent-assessee.”
The assessee has relied upon the judgment of ITAT special
bench in the case of Vireet Investment Pvt. Ltd. In this
regard, it is pertinent to mention that Hon’ble Bombay High
Court in the case of Vodafone India Services Pvt. Ltd. Vs.
Additional Commissioner of Income Tax & Ors. (2014) 264
CTR 0030 (Bom) (2013) 96 DTR 0193 (Bom) (2014) 361 ITR
0531 (Bom) (2014) 221 Taxman 0166 (Bom), has held that
the proceedings before DRP are extension of assessment
proceedings. Therefore, they are not bound by the decision
of Tribunals unlike CIT(A) as long as the issue is not
acceptable on merit and/or the issue is being contested by
the department. In this case, the decision of Hon’ble Delhi
High Court in the case of Goetze (India) Ltd cited above is
also in favour to the department on this issue which also
shows that the view of AO confirmed by the Panel is a
plausible view.
19 There were contradictory orders at the end of the Tribunal
Therefore, Special Bench was constituted to consider the following
question:
“Whether expenditure incurred to earn exempt income
computed under section 14A could not be added while
computing book profit under section 115JB of the Act.”
20 When the Special Bench has considered this question, it was
confronted with two decisions of the Hon’ble Delhi High Court
diagonally opposite to each other. One referred by the Id. DRP also
in the present case, rendered in the case of CIR Vs. Goetze India
Ltd. (Supra) and other in the case of Pr CIT Vs. Bhushan Steel
ITAT, Special Bench has reproduced both these orders in Vireet
Investment P. Ltd. (supra) and thereafter it considered as to which
decision ought to be followed by a subordinate authority. The
department advanced an argument that in the case of Bhushan
Steel, Hon’ble Delhi High Court failed to consider subsequent
decision of CIT Vs. Goetze India Ltd. (supra). However, the
Tribunal after placing reliance upon the decision of Hon’ble
Supreme Court in the case of CIT Vs. Vegetable Products Ltd., 88
ITR 192 (SC) and other decisions has held that it is incumbent
upon it follow the decision of Hon’ble Delhi High Court in the case
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of Bhushan Steel. In this case, Hon’ble Delhi High Court has held
as under.
“However, Ld. Senior Counsel has relied on the decision in the
case of Bhushan Steel Ltd. (supra) wherein it has been held as
under“ΙΤΑ 593/2015
PR. CIT Appellant
Through. Mr. N.P. Sahni, Senior Standing Counsel with Mr. Nitin
Gulati, Advocate VersusBHUSHAN STEEL LTD. Respondent
Through: Ms. Kavita Jha, Advocate with Ms. Roopali Gupta,
Advocate.
ORDER 29.09.2015
*** *** ***
*** *** ***
7. Question No.6 concerns deletion of addition of Rs.89,00,000
made by the AO for computation of the income fore the purposes of
Minimum Alternate Tax (MAT) under section 115JB of the Act. This
pertained to the expenditure incurred for earning exempt income
under section 14A read with Rule SD. The ITAT has rightly held
that this being in the nature of disallowance, and with Explanation
115JB not specifically mentioning Section 14A of the Act, the
addition of Rs.89,00,000 was not justified. The view taken by the
ITAT cannot be faulted with. It is consistent with the decision in
Apollo Tyres Ltd. V. Commissioner of Income Tax 255 ITR 273 (SC)
which held that “the Assessing Officer does not have the
jurisdiction to go behind the net profit shown in the profit and loss
account except to the extent provided in the Explanation to Section
115J.” The Court declines to frame a question on the above issue.”
21. Apart from the above, we have a binding precedent before us –
one from Hon’ble jurisdictional High Court and other from the
Hon’ble Bombay High Court. The question considered by the
Hon’ble Gujarat High Court in the case of Alembic Ltd. (supra) is
as under:
“Whether on the facts and in the circumstances of the case
and in law, the ITAT was justified in holding that adjustment
made on account of disallowance u/1.14A of the Act in
computation of book profit u/s 115JB of the Act is not as per
law without appreciating that the amount disallwable under
section 144 is covered under clause (f) of Explanation to
section 115JB(2) and, thus, said amount has to be added
back while computing amount of book profit?
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22 The Hon’ble Gujarat High Court has replied this question as
under:
7. So far as issue Nos. (iii) and (iv) are concerned, the
learned counsel for the assessee has relied on the decision of
this court in the case of Commissioner of Incometax-1 v.
Gujarat State Fertilizers & Chemicals Ltd., reported in
(2013) 358 ITR 323 (Gujarat) Where this court has held in
paragraph Nos 6 to 6.5 this court has observed as under:
6. So far as the fourth question is concerned, it pertains to
addition of Rs. 1,14,43,040/under Section 115JB of the Act
being the expenditure estimated on earning of dividend
income under Section 14A of the Act.
6.1 The Assessing Officer on referring to the said provision
of Section 115JB(2) of the Act added the said amount
considering that any amount of expenditure relatable to the
income exempted under Section 10 of the Act shall need to
be added in the profit shown in the Profit and Loss Account.
When the matter travelled to the CIT (Appeals), since it
deleted the addition of Rs. 1,14,43,040/while deciding the
question No. 1, it consequently deleted such addition under
Section 115JB of the Act on the ground that this would not
serve any purpose.
The Tribunal decided the said issue as follows:
“94. We have considered the rival submissions and we find
that similar issue was raised by Revenue as per ground No.3
above in respect of regular assessment of income and while
deciding that ground, we have already upheld that
disallowance of Rs.5 lakh in respect of administrative
expenses will meet the ends of justice and no disallowance is
called for in respect of interest expenditure.
Hence, for the purpose of computing book profit u/s.115JB of
the Act also, we hold accordingly and confirm the addition of
Rs.5 lakh.
This ground of Revenue’s appeal is partly allowed.”
As rightly held by both, the CIT (Appeals) and the Tribunal,
this issue has a direct correlation with the first question. It
was argurd by the Revenue that while computing the book
profit under Section 115JB of the Act, the disallowance of
interest expenditure on exempt income was wrongly
negatived by both the authorities on the ground that it was
not the liability for expenses, but a liability relating to
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assets.
We find no fault in the approach adopted by both the
authorities. The addition under section 115JB of the Act of a
sum of Rs. 1,14,43,040/-when was made as an expenditure
estimated on earning of dividend income under Section 14A
of the Act, without reiterating the rationale of confirming
deletion of such amount as has been elaborately done at the
time of deciding question No.1, this deletion requires to be
confirmed.”
8. Taking into consideration the evidence on record and
considering the decision of this court in the case of
Commissioner of Incometax-I vs. Gujarat State Fertilisers &
Chemicals Ltd. (supra), we are of the opinion that issue Nos.
(iii) and (iv) required to be answered in favour of the
assessee and against the revenue. In that view of the matter,
we answer questions (iii) and (iv) referred to us in favour of
the assessee and against the revenue. The appeal of revenue
is dismissed.
23. Similarly, Hon’ble Bombay High Court has formulated following
question in the case of Bengal Finance & Investments P. Ltd.
(supra) and replied as under:
(b) Whether on the facts and in the circumstances of the
case, and in law, the ITAT is justified in deleting the addition
of Rs.78,84,387/ under clause (f) of Explanation 1 to Section
115JB relying upon the decision in the case of Goetze (India)
Ltd. Vs. CIT (2009) 32 SOT 101 (Del.), which has been
followed by ITAT, Mumbai in the cases referred to in para 5
of the impugned order without appreciating that the above
decision in the case of Goetze (India) Ltd. was rendered by
the ITAT, Delhi Bench on completely distinguishable set of
facts, peculiar to the said case?”
…. ….. …..
4. So far as question (b) is concerned, the impugned order of
the Tribunal followed its decision in M/s. Essar Teleholdings
Ltd. Vs. DCIT in ITA No.3850/Mum/2010 to held that an
amount disallowed under section 14A of the Act cannot be
added to arrive at book profit for purposes of Section 115JB
of the Act. The Revenue’s Appeal against the order of the
Tribunal in M/s. Essar Teleholdings (supra) was dismissed by
this Court in Income Tax Appeal No. 438 of 2012 rendered
on 7th August, 2014. In view of the above, question (b) does
not raise any substantial question of law.
24 Respectfully following the above decision, we hold that no
addition in the book profit would be made on the basis of
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calculations worked out under section 144 of the Act. We allow this
ground of appeal in both the years and delete the additions.”
23. We take note of the fact that in context with the third propound
question, the ITAT placed reliance on the following decisions:
(1)CIT V. Alembic Ltd (Tax Appeal No 1249/2014)
(2) CITI vs. Gujarat State Fertilizers & Chemicals Ltd (2013) 358
ITR 323
24. The issue is squarely covered and in our opinion, no error could
be said to have been committed by the ITAT in taking the view that
no addition in the book profit can be made on the basis of the
calculation worked out under Section 14A of the Act.”
5.3 In view of the above, the second proposed substantial
question of law raised in this appeal is squarely covered by
the decision of this Court in the case of Gujarat
Fluorochemicals Ltd (supra) as well as by the subsequent
decision of this Court in the case of The Principal
Commissioner of Income Tax, Vadodara-1 Vs. Gujarat
Urja Vikas Nigam Ltd., in Tax Appeal No. 63 of 2020
decided on 17.02.2020. Further, there is concurrent finding of
the Tribunal and CIT (Appeals) to the effect that to include
disallowance under Section 14A of the Act, computation of
book profit under Section 115JB of the Act is required to be
deleted.
6 In view of the above findings of fact arrived at by the
Tribunal and both the substantial questions raised in this
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appeal, being answered against the revenue by various
pronouncements of this Court as mentioned herein above, no
question of law, much less substantial question of law arises.
7 The appeal stands dismissed accordingly. No order as to
costs.
(BHARGAV D. KARIA, J)
(PRANAV TRIVEDI,J)
BIMAL
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