Companies Act Case Law Commissioner Of Income-Tax Bier Vs M/S Bankipur Club Ltd




DATE OF JUDGMENT: 08/05/1997






CA NOS. 505/92, * SLP(C) 22644/94, CA 3974/92, 4777-78/89,
4534/91, 1635/94, 1648-1649/94, 2380-82/94- SLP (C)
2811/94, CA 8046/95, 1773/92, 4303/95, 3840/96 AND 10194/95.
* CA 3382/97 ** CA 3383/97
Hon’ble Mr. Justice K.S. Paripoornan
Hon’ble Mr. Justice S. Saghir Ahmad
J. Ramamurthy, Harish N. Salve, Sr. Advs, S. Rajappa, Dhruv
Mehta, B. Krishna Prasad, P. Parmeswaran, D.S. Mehra,
U. Rana, Rajiv Tyagi, Sudhanshu Tripathi, M.J.S.
Rupal, P. Mukherjee, Sanjoy Kumar Ghosh, (Manoj Swarup) Adv.
for M/s. Manoj Swarup & Co., S.K. Aggrawal, Vinay Vaish and
Amarendra Sharan, Advs. with therm for the appearing
The following Judgment of the Court was delivered.
Special leave granted in SLP (C) Nos. 22644/94 and
2. This batch of 23 cases was posted together. That was so
done on the basis that the same and identical point arises
for consideration in all of them. On further verification,
it turned out that in 7 appeals, the point that arises for
consideration is little different. On the question arising
in those appeals no arguments were advanced. So, the said
seven appeals are de-linked, to be posted later for hearing.
3. For convenience sake, the 23 cases including seven
appeals which are de-linked can be classified into 5 groups.
Group-A: C.A. Nos. 854-858/86 Commissioner of Income-tax *
Bihar v. M/s. Bankipur Club Ltd. Group-B: C.A. Nos. 505/92
and 3974/92 – Commissioner of Income-tax. Bihar-II v. Ranchi
Club Ltd., Group-C: C.A. No. 5382./97 (arising out of SLP
(C) No.22644/94 and C.A. No.10194/95 – Commissioner of
Income tax Bombay v. Cricket Club of India; Group-D: C.A.
Nos. 1635/94 * 1648-49/94, 2380-82/94 and C.A. No. 3583/97
(arising out of SLP (C) No. 2811/94) – Commissioner of
Income tax Jalandhar v. Northern India Motion Pictures
Association, Group-E: C.A. Nos. 4777-78/89, 4534/91,
8046/95, 1773 (NT)/92, 4303/95 and 3840/96 – Commissioner of
Income tax, Kanpur v. Cawnpore Club Ltd.
4. As state earlier, the appeals coming within Group – E –
CIT, kanpur V. Cawnpore Club Ltd. (seven appeals) are de-
linked and they will be posted separately to be heard on
merits. We shall indicate the reason for this a little
5. We heard counsel. The following vital aspects should be
borne in mind in adjudicating the question that arises for
consideration in this batch of 16 appeals (covered by Groups
A to D). The Revenue is the appellant in all the appeals.
The respondents in all the appeals are “Members’ Clubs”.
They are also called “social action groups”. They are all
companies, registered under Section 25 of the Companies Act,
1956 – “non-profit companies”. The respondents are assessees
to income tax. They claimed exemption on their “surplus
receipts” on the ground that they are “clubs” – a species of
mutual undertaking, and do not carry on any “trade or
business”. They do not earn any profit. The income received
by the clubs by extending facilities to non-members is not
in issue in this batch of appeals. According to Revenue,
even the surplus receipts of the clubs by affording
facilities to its members, is “income” and so, taxable. That
is the sole question arising for consideration in this
batch of appeals.
6. Under the Income-tax Act (hereinafter referred to as
‘the Act’) what is taxed is, the “income, profits or gains
earned or “arising”, “accruing’ to a person”. The question
is whether in the case of Members’ Clubs – a species of
mutual undertaking – in rendering various services to its
members which result in a surplus, the club can be said to
“have earned income ar profits” In order to answer the
question, it is necessary to have a background of the law
relating to “Mutual trading” or “Mutual undertaking” and a
“Members’ Club”.
7. In Halsbury Laws of England, 4th Edition Reissue Volume
23 paras 161 and 162 (pages 130 and 132), the relevant law
is stated thus:
“Where a number of persons
combine together and contribute to
a common fund for the financing of
some venture or object and will in
this respect have no dealings or
relations with any outside body,
then any surplus returned to those
persons cannot be regarded in any
sense as profit. There must be
complete identity between the
contributors and the participators.
If these requirements are
fulfilled, it is immaterial what
particular form the association
takes. Trading between persons
associating together in this way
does not give rise to profits which
are chargeable to tax.
Where the trade or activity is
mutual, the fact that, as regards
certain activities, certain
members only of the association
take advantage of the facilities
which it offers does not affect
the mutuality of the enterprise.
xxx xxx
Members clubs are an example
of a mutual undertaking, but,
where a club extends facilities to
non-members, to that extent the
element of mutuality is
wanting…………. ”
(Emphasis supplied)
Simon’s Taxes Vol.B 3rd Edition, paragraphs B 1.218 and
B1.222 (pages 159 and 167), formulate the law on the point,
“…….. it is settled law that if
the persons carrying on a trade do
so in such a way that they and the
customers are the same persons, no
profits or gains are yielded by the
trade for tax purposes and
therefore no assessment in respect
of the trade can be made. Any
surplus resulting from this form
of trading represents only the
extent to which the contribution
of the participators have proved to
be in excess of requirements. Such
a surplus is regarded as their own
money and returnable to them. In
order that this exempting element
of mutuality should exist it is
essential that the profits should
be capable of coming back at some
time and in some form to the
persons to whom the goods were sold
or the services rendered.
“lt has been held that a company
conducting a members’ (and not a
proprietary) club, the members of
the company and of the club being
identical, was not carrying on a
trade or business or undertaking
of a similar character for purposes
of the former corporation profits
A members’ club is assessable,
however, in respect of profits
derived from affording its
facilities to non-members. Thus, in
Carlisle and Silloth Golf Club v.
Smith [1913(3) K. B. 75], where
members’ golf club admitted non
members to play on payment of green
fees it was held that it was
carrying on a business which could
be isolated and defined and the
profit of which was assessable to
income tax. But there is no
liability in respect of profits
made from members who avail
themselves of the facilities
provided for members.”
(emphasis supplied)
In British Tax Encyclopedia (I) 1962 edition (edited by
G.S.A. Wheatcroft) at pages 1200 and 1201, dealing with
“Mutual trading operations”, the law is stated, thus:-
“In several early cases there
were dicta to the effect that a man
could not make a profit be trading
with himself this developed into
the proposition that when persons
contribute to a common fund in
pursuance of a scheme for their
mutual benefit, having no dealings
or relations with any outside body,
they cannot be said to have made a
profit when they find they have
overcharged themselves and that
some portion to their contributions
incorporate themselves into a
separate entity to carry out the
mutual scheme and the surplus
contributions are put to reserve
and not immediately returned. For
this doctrine to apply it is
essential that all the contributors
to the common fund are entitled to
participate in the surplus and that
all the participators in the
surplus are contributors so that
there is complete identity between
contributors and participators.
This means identity as a classs so
that at any given moment of time
the persons who are contributing
are identical with the persons
entitled to participate; it does
not matter that the class
may be diminished by persons going
out of the scheme or increased by
other coming in. .. … … … …
The doctrine now has
application in three areas. First,
it applies to mutual insurance
companies; secondly, it applies to
certain municipal undertakings and,
thirdly, to members’ clubs, and
mutual associations generally,
whether incorporated or
unincorporated, except registered
industrial and provident societies.
… … … …”
(emphasis supplied)
It should be noticed that in the case of “mutual
society or concern” (including a “Members’ club”), there
must be complete identity between the class of contributors
and the class of participators. The particular label or form
by which the mutual association is known, is of no
consequence. The said principle which has been laid down in
the leading decisions and emphasised in the leading English
text books mentioned above, has been explained with
reference to Indian decision in “The Law and Practice of
Income Tax” (8th edition vol. 1, 1990) by Kanga & Palkhivala
at page 113, thus:-
“…… The contributors to
the common fund and the
participators in the surplus must
be an identical body. That does not
mean that each member should
contribute to the common fund or
that each member should participate
in the surplus or get back from the
surplus precisely what he has paid.
The Madras. Andhra Pradesh and
Kerala High Courts have held that
the test of mutuality does not
require that the contributors to
the common fund should willy-nilly
distribute the surplus amongst
themselves: it is enough if they
have a right of disposal over this
surplus, and in exercise of that
right they may agree that on
winding up the surplus will be
transferred to a similar
association or used for some
charitable objects ”
8. The crucial issue that arises for consideration in
cases where it is claimed that on the basis of the principle
of mutuality, the receipts by the “society” or “club” is
exempt from taxation, has been succinctly stated by the
judicial Committee of the Privy Council in Fletcher v.
Income Tax Commissioner [1971 (3) AJI ER 1185 at page 1189],
“… … … Is the activity, on
the one hand, a trades or an
adventure in the nature of trade
producing a profit, or is it, on
the other, a mutual arrangement
which, at most, gives rise to a
In substance, the arrangement or relationship between
the club and its members should be of a non-trading
9. In C.A. Nos. 854-858184 (Group-A), the assessee is M/s.
Bankipur Club Ltd.. The appeals are preferred against the
common judgment of the Patna High Court rendered in T.C.
No.46-50/70 dated 14.10.1980 reported as Commissioner of
Income-tax, Bihar v Bankipur Club Ltd. (129 ITR 787). The
questions referred to the High Court are the following:
“(i) Whether, on the facts and in
the circumstances of the case the
profits arising from the sales made
to the regular members of the club
is entitled to exemption on the
doctrine of mutuality.
(ii) Whether, on the facts and in
the circumstances of the case the
directions given by the Tribunal
are valid in law?”
The assessment years involved are 1960-61 to 1964-65.
The assessee club filed “nil” returns. The assessee had
income from house property and also from business or
professica. The receipt under the head “sale of drinks at
the Bar” was alone disputed in all the aforesaid five years.
The Income Tax Officer held that the profit on the sale
proceeds of the drinks by the club in income and so, liable
to be taxed. It is seen that the main object of the club, as
per the memorandum of association, is to afford to its
members all the usual privileges, advantages, conveniences
and accommodation of a club. Clause 5 of the memorandum of
association makes a provision that upon a winding-up or
dissolution of the company if there remains any property
left after the satisfaction of all debts and liabilities the
same shall be paid to and distributed amongst the members of
the company in equal shares. Article 6 of Articles of
Association reads thus:
“Only permanent members shall be
deemed to be members of the club.”
Article 15 speaks of temporary members who may be
elected for non exceeding three months in any calendar year.
To become a temporary member the person would be a person
not permanently residing at Patna or within ten miles of it.
No entrance fee is payable by them, but they are to pay a
fixed monthly subscription. Under Article 5, the Governor
and the Chief Minister of the State may be invited by the
committee to become honorary members of the club. Article 17
is a provision for giving to the temporary and the honorary
members all the privileges of the club, subject to such
restrictions and regulations as may be prescribed by the
rules or bye-laws of the club. They have, however, no right
to vote at a meeting or be elected on committees or bring
any guest. The assessments were upheld by the Appellate
tribunal accepted the plea of the assessee that the
principle of mutuality would apply in regard to the sale of
drinks at the bar. It was held that as regards sales to
regular members the profit arising from sales to them is not
liable to be taxed under the principle of mutuality. The
High Court adverted to the fact that nobody is allowed to
enjoy the privileges of the club other than its members and
the bar in question where drinks are sold is open to its
members, both permanent as well as temporary, and that no
outsider can purchase any drink from the said club. The High
Court took the view that while selling drinks to its
members, it is not done with motive of profit earning which
can be said to be tainted with “commerciality”. The members
pay the monthly subscription and in addition, they enjoy the
benefit of this privilege of supply of drinks to them on
additional payment and so there is no profit earning motive
so far as this transaction is concerned. The Court
concluded that the profits arising from the sales of drinks
at the bar to the regular members of the club is entitled to
exemption on the doctrine of “mutuality”.
10. In C.A No. 505/92 and C.A No. 3974/92 (Group-B), the
assessee is Ranchi Club Ltd. The main decision is one
rendered in T.C. 54/80, subject matter of C.A. 505/92. The
judgment is dated 24.9.1991 and is reported in Commissioner
of Income-tax v. Ranchi Club Ltd. [196 ITR 137 (FB)]. The
questions referred to the High Court are as follows:
“(1) Whether on the facts and in
the circumstances of the case. the
Tribunal has rightly held that the
assessee-club is a mutual concern?
(ii) Whether, on the facts and in
the circumstances of the case, the
Tribunal has rightly held that the
income derived by the assessee-
club from its house property let to
its members and their guests is not
chargeable to tax?
(iii) Whether, on the facts and in
the circumstances of the case, the
Tribunal has rightly held that the
income derived by the assessee-club
from sale of liquor, etc, to its
members and their guests is not
taxable in its hands”
In these cases, the assessee was a company formed with
the main object of providing a club house and other
conveniences for the use of its members and their friends.
The memorandum of association provided for contribution has
the members to the common fund of the club, guarantee
towards debts and liabilities, and upon winding up, their
participation in the surplus. Apart from the concept of
“member” envisaged a in the memorandum, it had created one
more class described as temporary members. The temporary
members were not deemed to be members. For the assessment
year 1977-78. the assessee had filed its return showing its
income under the head property” representing the income
arising out of gross rent and reservation charges received
by it from persons other than members. But, the Income-tax
officer, while assessing the income, also the Income-tax
Officer, while assessing the income, also included the
amount received by the assessee even from its members on
account of rent from the club property and the receipts on
sale of liquor, etc, to its members and their guests. The
decision rendered by the High Court as summarised in the
head-note (196 ITR 137 at page 139) is as follows:-
“.. .. that merely because
the assessee company had entered
into transactions with non-members
and earned profits out of
transactions held with them, its
right to claim exemption on the
principle of mutuality in respect
transactions held by it with its
members was not lost. The assessee
was a mutual concern. The income
derived by it from its house
property let to its members and
their guests and from the sale of
liquor etc.. to its members and
their guests was not taxable in its
(emphasis supplied)
11. C.A. No. 10194/95 and C.A. No…../97 (arising, out of
SLP (C) 22644/94) relate to the assessee, the Cricket Club
of India. The proceedings relate to Assessment years 1977-78
and 1978-79. Amongst others, the Cricket Club of India was
in receipt of income from property owned by it – chambers in
the building of the assessee let out to members, annual
value of the club house and annual value of Patiala
Pavilion. The above facilities were provided only to members
of the association and that too temporary accommodation. The
arrangement was essentially for the benefit of the members.
Following the decision rendered by the Appellate Tribunals
Bombay Bench, for the assessment years 1974-75 and 1976-77
rendered in ITA Nos. 1730 and 1913 (Bombay) of 1980 the
appellate tribunal held that no portion of the Club House.
Patiala Pavillion etc. is let out to strangers and that
these portions are let out only to the members and so, even
if an income had actually accrued due from the members on
the above counts, it will not be taxable on the principles
of mutuality. In the application filed under Section 256(2)
of the Act, the High Court declined to refer the question of
law posed by the Revenue, to the effect, “whether the
appellate tribunal was justified in law in holding that the
income from the property held by the assessee could not be
brought to charge under the provisions of Sections 22 to 26
of the Act?” The decision was followed for the assessment
year 1978-79 – C.A. 10194/95 and the High Court declined to
refer any question of law for this year as well. In fact
both the years. the decision of the appellate tribunal to
the effect that the income received from the aforesaid
counts is exempt under the principle of mutuality, was not
doubted by the High Court? holding that no referable
question of law arose by its decision.
12.We now come to Group-D In C.A. Nos. 1635/94. 1648-49/94,
2380-82/94 and C A 3383/97 @ SLP 2811/94) come within this
group. The assessee in this case is Northern India Motion
Pictures Association. The details with regard to the above
appeals are as follows:
1. CA No.1635 of 1987-88 Appln. U/S
1994 256(2) rejected
2. CA Nos. 1648- 1982-83 & 1985- do
49 of 1994 86
3. CA Nos. 2380- 1974-75 to 1976- Reference
82 of 1994 77 answered in
favour of
4. SLP (C) No. 2811 1989-90 Appln. U/S.
of 1994 256(2) rejected
The assessee is an association consisting of Film
Distributors and Exhibitors incorporated as a company under
Section 25 of the Companies Act? 1956 (Section 26 of the
Companies Act, 1913) in the year 1949 The income of the
Association consists of (i) admission fees, readmission
fees, periodical subscriptions from the members, etc. under
the head “others” and (ii) service charges from the members
for rendering specific services to the members under the
head “Service to the members”. The income under the head
“Service to the members” was always offered for tax and
assessed to tax under Section 28(iii) of the Act and there
is no dispute about the same. The income under the head
“others” was claimed to be not taxable on the principle of
mutuality. The claim of the assessee for exemption from levy
of tax, on the ground of “mutuality” was denied in view of
clause 7 of the Memorandum of Association of the Assessee.
which was to the following effect:-
“If upon the winding up or
dissolution of the Association
there remains after the
satisfaction of all its debts and
liabilities any property whatsoever
the same shall not be paid to or
distributed amongst the members of
the Association but shall be given
or transferred to such other
institution or institutions having
objects similar to the objects of
the Association to be determined by
the members of the Association at
or before the time of dissolution
or in default thereof by the Prime
Minister of East Punjab, and if and
so far as effect cannot be given to
the aforesaid provision then to
some charitable object.”
(emphasis supplied)
In an earlier assessment year, 1977-78 an identical
question relating to the same assessee arose before the High
Court of Punjab & Haryana in ITR No. 69/81. The decision
thereon dated 27.4.1989 is reported in Commissioner of
Income-tax v. Northern India Motion Pictures Association
[180 ITR 160]. The following questions were referred to the
High Court:-
“(1) Whether, on the facts and in
the circumstances of the case. the
principle of mutuality is
applicable to the assessee’s
receipts under the head ‘Others’?
(2) Whether, on the facts and in
the circumstances of the case, the
Tribunal was right in holding that
the receipts under the head
‘Others’ were neither income liable
to be taxed under the head
‘Business’ nor under the head
‘Other sources?
The facts in the said case and the decision by the High
Court are neatly summarised in the head note of the reports
at pages 160-161:-
“The, assessee was an
association and its members were
film distributors and exhibitor’s.
The association protected the
rights of, its members in return
for admission fees and periodical
subscription and also rendered
specific services in return for
separate charges. The Income-tax
Officer wanted to subject the
assessee to tax on the income
derived from the admission fee,
periodical a subscriptions and
specific service charges received
from the members. The assessee
pleaded that the receipts were
exempt from tax on the general
principle of mutuality. The Income-
tax Officer did not agree with the
plea on the grounds that in clause
7 of the memorandum of association
it was provided that upon winding
up or dissolution of the
association, the remaining
property, after the satisfaction of
its debts and liabilities, shall
not be paid or distributed amongst
the members but shall be given or
transferred to such other
institution or institutions having
similar objects to be determined
by the members at or before the
time of dissolution, or in default
thereof by the Prime Minister of
the East Punjab and if this could
not be done, then, to some
charitable object and hence the
amount was not to go back to the
members. The Tribunal however held
that the income of the assessee was
not taxable. On a reference:
Held, that the contributors by
incorporating clause 7 did not
deprive themselves of the control
on the disposal of the surplus.
Ultimately, they could agree to
divide the surplus among themselves
or to contribute the amount to a
similar association or to a
charitable trust. The assessee was
a mutual benefit association and
its income was not taxable.”
The said judgment was followed subsequently in all
matters arising under Sections 256(1) and 256(2) of the
Act. So, for the assessment years which are subject matter
of cases falling under Group-D stated herein above, the
above decision reported it 180 ITR 160 was followed and the
income received by the assessee under the head “Others” –
admission fees readmission fee. periodical subscription from
the members etc. were held to be exempt or non-taxable on
the principle of mutuality.
13. The above four sets of cases falling in Groups A to D
shall alone be covered by this Judgment. With regard to 7
cases/appeals falling in Group-E the Assessee is Cawnpore
Club Ltd. It is seen that the income that was sought to be
assessed in the case of assessee, was one derived from
property let out and also Interest received from F.D.R.,
N.S.C. etc. In these cases the Court held that income should
be assessed as one from other sources” and not income from
property. It does not appeal that the larger plea that the
income is totally exempt on the principle of mutuality, was
decided in favour of the assessee in the appeals filed by
the Revenue the only question that may probably arise is
whether income received from the property let out and
interest by way of F.D.R’s., N.S.C. etc. can be brought to
tax under the head; income from property”. Since the issue
raised in this batch of seven cases, is not similar to or
same as the one involved in the other cases coming under
Groups A to D. we do not propose to deal either a with the
facts or the decisions rendered be the authorities in this
batch of cases (Group-E). All that we propose to do is to
delink the cases coming under Group-E and direct them to be
posted separately for hearing and disposal before an
appropriate Bench.
14. Now we turn to the main question canvassed be the
Revenue in the appeals coming under Groups A to D, namely,
whether the assessees, mutual clubs. are entitled to
exemption for the receipts or surplus arising from the
sales of drinks refreshments etc. or amounts received be
way of rent for letting out the buildings or amounts
received by way of admission fees periodical subscriptions
and receipts of similar nature, from its members? In all
these cases. the appellate tribunal as also the High Court
have found that the amount received by the clubs were for
supply of drinks? refreshments or other goods as also the
letting out of building for rent or the amounts received be
way of admission fees. periodical subscription etc. from the
members of the clubs were only for/towards charges for the
privileges, conveniences and amenities provided to the
members, which they were entitled to as per the rules and
regulations of the respective Clubs. It has also been found
that different clubs realised various sums on the above
counts only to afford to its members the usual privileges,
advantages, conveniences and accommodation. In other words,
the services offered on the above counts were not done. with
any profit motive and were not tainted with commerciality.
The facilities were offered only as a matter of convenience
for the use of the members. (and their friends, if any,
availing of the facilities occasionally)
In the light of the above findings, it necessarily
follows that the receipts for the various facilities
extended by the clubs to its members, as stated herein above
as part of the usual privileges, advantages and
conveniences; attached to the members of the club, cannot be
said to be “a trading activity.” The surplus – excess of
receipts over the expenditure – as a result of mutual
arrangement, cannot be said to be income” for the purpose of
the Act.
15. Our attention was invited to a few decisions which have
dealt with the subject matter in issue herein. The list of
the various English decisions has been succinctly summarised
in the textbooks which we have adverted to herein above
(Halsbury’s Laws of England, Simon’s Taxes, Wheatcroft
etc.). Particular stress was laid on the decisions of the
Supreme Court in Commissioner of Income-tax. Bombay City v.
The Royal Western India Turf Club Limited [24 ITR 551],
Commissioner of Income-tax. Madras v. Kumbakonam Mutual
Benefit Fund Ltd [53 1TR 241], Fletcher (on his own behalf
and on behalf of Trustees and Committee of Doctor’s Cave
Bathing Club) v. lncome Tas Commissioner [1971 (3) All ER
(PC) 1185]. We do not think it necessary to deal at length
with the above decisions except to state the principle
discernible from them. We understand these decisions to lay
down the broad proposition – that if the object of the
assessee company claiming to be a “mutual concern” or
“club”, is to carry on a particular business and money is
realised both from the members and from non-members, for the
same consideration by giving the same or similar facilities
to all alike in respect of the one and the same business
carried on by it, the dealings as a whole disclose the same
profit earning motive and are alike tainted with
commerciality. In other words, the activity carried on by
the assessee in such cases, claiming to be a “mutual
concern” or “Members’ club” is a trade or an adventure in
the nature of trade and the transactions entered into with
the members or non-members like a trade/business/transaction
and the resultant surplus is certainly profit — income
liable, to tax. We should also state, that “at what point?
does the relationship of mutuality end and that of trading
begin” is a difficult and question. A host of factors may
have to be considered to arrive at a conclusion. “Whether or
not the persons dealing with each other, is a “mutual club”
or carrying on a trading activity or an adventure in the
nature of trade”.is largely a question of fact. [ Wilcock’s
case – 9 Tax Cases 111, (132) C.A. (1925) (1) KB 30 at 44
and 45.].
16. In the result, we hold that ht judgment and orders
passed by the High Courts covered by Groups A,B,C And D, as
stated above, do not merit any interference. The reasoning
and conclusion of the High Courts in the judgments and
orders impugned are in accord with the settled legal
principles as laid down by Courts. The 16 appeals covered by
Groups A to D filed by the Revenue are, therefore, dismissed
with costs, including advocate’s fees which we estimate at
Rs. 5,000/- in each appeal.



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