Benefit of set off of loss of Partnership Firm: AO could examine applicability of section 79 only in the year in which loss was set off, and not in the year in which assessee claimed the loss to be carried forward.

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Benefit of set off of loss of Partnership Firm: AO could examine applicability of section 79 only in the year in which loss was set off, and not in the year in which assessee claimed the loss to be carried forward.

Short Overview Claim for set-off of carried forward business losses prior to assessment years 2006-07 against  profits of concerned  assessment year, i.e., assessment year 2012-13 vis-a-vis  provisions of section 79 had to be examined by AO only in the assessment year in which  assessee claimed such set off of losses in the return of income.

During the assessment year under consideration, i.e., assessment year 2012-13 assessee in the return of income claimed set-off of losses relating to the assessment years prior to assessment year 2006-07. However, AO denied set-off of unabsorbed business loss on the ground that carry forward of losses was denied by AO in assessment year 2006-07 invoking section 79. Assessee’s case was that AO could examine applicability of section 79 only in the year in which loss was set off, and not in the year in which assessee claimed the loss to be carried forward.

It is held that Claim for set off of carried forward losses prior to assessment years 2006-07 against  profits of concerned  assessment year, i.e., assessment year 2012-13 vis-a-vis  provisions of section 79 had to be examined by AO only in the assessment year in which  assessee claimed such set off of losses in the return of income. AO was directed accordingly.

Decision: Matter remanded.

Followed: CIT v. Manmohan Das (1966) 59 ITR 699 (SC) : 1966 TaxPub(DT) 236 (SC).

IN THE ITAT, MUMBAI BENCH

C.N. PRASAD, J.M. & M. BALAGANESH, A.M.

Orra Fine Jewellery (P) Ltd. v. Dy. CIT

ITA Nos. 2925 & 2926/Mum/2018

25 September, 2020

Assessee by: Nitesh Joshi and P.P. Bhandari

Department by: Kumar Padmapani Bora

ORDER

C.N. Prasad, J.M.

  1. These two appeals are filed by the assessee against different orders of the learned Commissioner (Appeals)-50, Mumbai [hereinafter in short “Ld. CIT(A)”] dated 21-4-2014 and 31-6-2016 for the assessment year 2012-13 & assessment year 2013-14 respectively.
  2. As the issues being identical, these appeals are disposed of by way of this common order for the sake of convenience.
  3. The common issue in both these appeals is regarding the learned Commissioner (Appeals) confirming the action of the assessing officer in denying set off of unabsorbed business loss on the ground that carry forward of losses was denied by the assessing officer in assessment year 2006-07 invoking the provisions of section 79 of the Act.
  4. Briefly stated the facts are that, during the assessment year 2006-07 assessee incurred business loss as per the return of income filed. Assessee also incurred business loss in earlier assessment years aggregating to Rs. 18.96 Crores and had sought to carry forward the said losses to be set off against business income of subsequent assessment years. However, the claim for carry forward of losses was denied by the assessing officer by invoking the provisions of section 79 of the Act, which was sustained by the learned Commissioner (Appeals) and also by the Tribunal inITA No. 5760/Mum/2009, dated 5-6-2013. Assessee carried the matter before the Hon’ble High Court and the appeal was admitted by the Hon’ble High Court on the following question of law :–

“(a) Whether the Tribunal ought to have held that the provisions of section 79 of the Act will not have any application for the year under consideration as the Appellant is not seeking set off of the brought forward business loss in this year?

(b) Whether the Tribunal ought to have held that the Appellant’s case is covered by the exception to section 79 of the Act?”

  1. As the things stood thus, during the assessment year under consideration, i.e., assessment year 2012-13 the assessee in the return of income claimed set off of losses relating to the assessment years prior to assessment year 2006-07. However, the assessing officer while completing the assessment under section 143(3) read with section 153(A) of the Act ignored the claim of the assessee for set off of losses against income for assessment year 2012-13.
  2. The assessee carried the matter before the learned Commissioner (Appeals) and contended that during the assessment year 2006-07 the assessing officer denied carry forward of brought forward losses by invoking provisions of section 79 of the Act. It was contended that the share holding pattern of the assessee company up to 31-3-2015 was as under :–
Name of the Shareholder No. of Equity Shares Percentage
Inter Gold India Pvt. Ltd. 10,99,850 54.99
Soignee Kothari 50 00.00
Rosy Blue (India) Pvt. Ltd. 5,99,900 30.00
Vijay N. Jain 2,00,000 10.00
Kajal Jain 1,00,000 05.00
Rosy Blue Investments Pvt. Ltd. 100 00.01
Harshad R. Mehta 100 00.01
TOTAL 20,00,000 100.00
  1. It was contended that on 10-3-2006, i.e., during the assessment year 2006-07 Inter Gold India Pvt. Ltd. which was holding 10,99,850 shares comprising 54.99% of the shareholding transferred 10,95,850 shares, i.e., 54.79% of the shares held by Inter Gold India Pvt. Ltd. to Rosy Blue (India) Pvt. Ltd. Consequent thereto Inter Gold India Pvt. Ltd. continued to hold the balance 4000 shares (10,99,850 – 10,95,850) earlier held by Inter Gold India Pvt. Ltd., i.e., 0.20% of the share capital of the assessee. After the purchase of the assessee’s shares from Inter Gold India Pvt. Ltd., Rosy Blue (India) Pvt. Ltd. which earlier held 5,99,900 shares, i.e., 30% of the assessee’s share capital came to hold 16,95,850 shares (5,99,900 + 100 + 10,95,850) thereby holding 84.79% of the share capital of the assessee company.
  2. It was contended that the share holding pattern of the assessee as on 31-3-2006 was as under :–
Name of the Shareholder No. of Equity Shares Percentage
Inter Gold India Pvt. Ltd. 4,000 00.20
Soignee Kothari 50 00.00
Rosy Blue (India) Pvt. Ltd. 16,95,850 84.79
Vijay N. Jain 2,00,000 10.00
Kajal Jain 1,00,000 05.00
Shah Mehta Holdings Pvt. Ltd. 100 00.01
TOTAL 20,00,000 100.00
  1. It was contended that the assessment for the assessment year 2006-07 was made on the assumption that Inter Gold India Pvt. Ltd. has transferred its entire shareholding to Rosy Blue (India) Pvt. Ltd. However, the factual position was that the said Inter Gold India Pvt. Ltd. had retained 4,000 shares of assessee which it continues to be held by it till date. It was contended that this fact was also confirmed by the annual returns filed by the assessee with the Registrar of Companies as well the audited accounts of Inter Gold India Pvt. Ltd. Therefore, it was contended that based on the mistaken information submitted by the assessee during assessment proceedings for assessment year 2006-07 it was held that in F.Y. 2005-06 there was a change in shareholding of the assessee Company and as a result of which shares carrying more than 51% of the voting power are not beneficially held by the persons who beneficially held shares carrying not less than 51% of the voting power in the year in which such loss was incurred. Accordingly, the assessing officer by invoking the provisions of section 79 of the Act, did not allow the loss of Rs. 18.96 Crores assessed up to assessment year 2005-06 to be carried forward to assessment year 2006-07 and onwards.
  2. Assessee contended before the learned Commissioner (Appeals) that the provisions of section 79 of the Act can be attracted only in the year in which the loss is set off and since the assessee claimed set off of loss only during the assessment year 2012-13 and subsequent years the applicability of provisions of section 79 of the Act is to be examined only during the assessment year 2012-13 and the decision of the assessing officer not to carry forward the loss prior to assessment year 2005-06 invoking provisions of section 79 of the Act has no relevance.

However, learned Commissioner (Appeals) sustained the action of the assessing officer in not allowing the set off of losses during the assessment year under consideration by observing that the losses incurred up to assessment year 2005-06 have already been denied in earlier assessment year, i.e., 2006-07 by invoking provisions of section 79 of the Act and the matter is now pending before the Hon’ble High Court.

  1. Before us, learned Counsel for the assessee Shri Nitesh Joshi submitted that in the return of income for assessment year 2012-13 assessee claimed set off of brought forward loss aggregating to Rs. 9,40,14,695. Learned Counsel for the assessee submitted that the provisions of section 79 of the Act were not applicable in the assessment year 2006-07 as the assessee was assessed at a loss and no set off was claimed. Learned Counsel for the assessee pleaded that claim for carry forward of business loss was denied invoking the provision of section 79 of the Act in assessment year 2006-07. According to the provisions of section 79 of the Act loss incurred by a company in any year prior to the previous year shall not be allowed to be carried forward and set off against the income of the previous year if the said company is not a company in which public are substantially interested and there is a change in the shareholding of that company. However, it is submitted that there is an exception to the said rule which provides that the said section 79 will have no application since on the last date of the current previous year the group of shareholder carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than 51% of the voting power on the last date of the year or years in which the loss was incurred. Therefore, it is submitted that one has to ascertain whether 51% of the shareholders of the assessee as on 31-3-2005 continued to hold 51% of the shares at the end of the financial year in which such losses are set off. Therefore, it is submitted that the provisions of section 79 can be attracted only in the year in which the loss is sought to be set off.
  2. The learned Counsel for the assessee submitted that the factual position of shareholding at the end of 31-3-2005 and as on 31-3-2013 are as under :–
Name of the Shareholder As on 31-3-2005 No. of % shares As on 31-3-2013 No. of % shares
Inter Gold India Pvt. Ltd. 10,99,850 54.99 4,000 00.20
Rosy Blue (India) Pvt. Ltd. 5,99,900 30.00 16,95,850 84.79
Vijay N. Jain 2,00,000 10.00 2,00,000 10.00
Kajal Jain 1,00,000 05.00 1,00,000 05.00
TOTAL 19,99,750 99.99 19,99,850 99.99
  1. Learned Counsel for the assessee submitted that assessee’s case is covered by exception provided in section 79 of the Act as more than 51% of its shares were held by the same group of shareholders as on 31-3-2005 and 31-3-2013. Learned Counsel for the assessee submitted that the denial of carry forward of losses in the assessment order for 2006-07, though the matter is pending for that year before the Hon’ble High Court, is without jurisdiction and cannot be applied in the year under consideration, the provisions of section 79 of the Act are not applicable. The assessment order denying the set off of losses incurred prior to assessment year 2006-07 is bad in law and ought to be cancelled.
  2. Learned Counsel for the assessee further submitted that the correct year for consideration of the issue of eligibility of set off of brought forward business loss against business income is the year in which such set off is claimed, i.e., the year under consideration. The findings given for the earlier year is of no consequence. Learned Counsel placed reliance on judgment of the Hon’ble Apex Court inCIT v. Manmohan Das (1966) 59 ITR 699 (SC) : 1966 TaxPub(DT) 0236 (SC) and the decision of the Chandigarh Tribunal in the case of Rajiv Gupta v. ITO (2008) 114 ITD 346 (Chd) : 2008 TaxPub(DT) 0588 (Chd-Trib). Learned Counsel for the assessee submitted that the findings reached by the Tribunal for assessment year 2006-07 will have no application for the year under consideration.
  3. Learned Counsel for the assessee further submits that the fact relating to Inter Gold India Pvt. Ltd. continuing to hold 4,000 shares of the assessee company is part of the record for the year under consideration.

Based on a plain reading of section 79 of the Act, it shall have no application to the present case which would be covered by the exception.

Reliance was placed on Judgment of the Hon’ble Apex Court in the case of Sri Agasthyar Trust v. CIT (1999) 236 ITR 23 (SC) : 1999 TaxPub(DT) 0405 (SC). Learned Counsel for the assessee submits that in the said case, the Court has upheld the Tribunal’s order granting exemption as a charitable trust, despite an earlier decision of the Apex Court holding the same assessee to be non-charitable upon consideration of further material. It is submitted that in the present case the further fact which is also fundamental to the issue is that Inter Gold India Pvt. Ltd. continued as a shareholder and, therefore, the assessee’s case would be covered by the exception in clause (a) of section 79 of the Act. Learned Counsel for the assessee therefore submits that the earlier order for assessment year 2006-07 should not bind the Tribunal for the year under consideration, in view of this fundamental aspect not being urged and, hence not considered by the Tribunal for that year.

  1. Learned Counsel for the assessee also placed reliance on the decision of the Hon’ble Supreme Court in the case ofCIT v. Italindia Cotton Co. Pvt. Ltd. (1988) 174 ITR 160 (SC) : 1988 TaxPub(DT) 1310 (SC) and submitted that as per clause (a) of section 79, as it stood for the year under consideration, the said provision would not apply where shares carrying more than 51% of the voting power were beneficially held by the same group of shareholders on the last day of the year in which the loss was incurred and the year in which the loss is sought to be set off. Learned Counsel for the assessee therefore submits that in the present case more than 99% of the shares of the assessee company was held by Inter Gold India Pvt. Ltd., Soignee Kothari, Rosy Blue (India) Pvt. Ltd., Vijay Jain and Kajal Jain, both at the time when the loss was incurred and also when it was sought to be set off. Therefore, it was submitted by the learned Counsel for the assessee that the disabling provision of section 79 of the Act should not apply to the present case. It was submitted that the provisions of section 79 of the Act does not apply to those cases where there is a inter se change in shareholding, provided the transferor of shares continues as a shareholder.
  2. Learned D.R. strongly placed reliance on the order of the learned Commissioner (Appeals). Learned D.R. submitted that the matter of carry forward of losses was already dealt in the assessment year 2006-07 and the claim was denied by the assessing officer invoking provisions of section 79 of the Act and the matter was carried to the Tribunal, Tribunal confirmed it and now the matter is pending before the Hon’ble High Court. He strongly supported the orders of the Authorities below.
  3. We have heard the rival submissions, perused the orders of the authorities below and the case laws relied on. The substantial issue for consideration now before us for the assessment year 2012-13 is whether the provisions of section 79 of the Act can be invoked and examined in the assessment year in which the assessee claimed for carry forward of losses or in the assessment year in which the assessee actually claimed set off of carry forward losses against the profits of that year. The assessee contends that the assessing officer can examine the applicability of the provisions of section 79 of the Act only in the year in which the loss is set off and not in the year in which the assessee claims the loss to be carried forward. In the present case during the assessment year 2006-07 the assessing officer invoking the provisions of section 79 of the Act denied carry forward of losses prior to the assessment year 2006-07. Assessee carried the matter unsuccessfully before the appellate authorities and the matter is now pending before the Hon’ble High Court.
  4. In the case ofCIT v. Manmohan Das (1966) 59 ITR 699 (SC) : 1966 TaxPub(DT) 0236 (SC) the following question which came up before the Hon’ble Allahabad High Court has been examined by the Hon’ble Supreme Court in the appeal preferred by the revenue —

“Whether the assessee could claim a set off of the loss suffered by him in the preceding year 1950-51 against his profits in the year under consideration, i.e., 1951-52, having failed to prefer an appeal against the refusal by the Income Tax Officer making the assessment for the year 1950-51 to allow the assessee to carry forward the loss under section 24(2) of the Act?”

  1. The Hon’ble Supreme Court held as under :–

“3. The second question presents little difficulty. In making his order of assessment for the year 1950-51, the Income Tax Officer declared that the loss computed in that year could not be carried forward to the next year under section 24(2) of the Income Tax Act, as it was not a business loss. The Income Tax officer has under section 24(3) to notify to the assessee the amount of loss as computed by him, if it is established in the course of assessment of the total income that the assessee has suffered loss of profits. Section 24(2) confers a statutory right (subject to certain conditions which are not material) upon the assessee who sustains a loss of profits in any year in any business, profession or vocation to carry forward the loss as is not set off under sub-section (1) to the following year, and to set off against his profits and gains, if any, from the same business, profession or vocation for that year.

Whether the loss of profits or gains in any year may be carried forward to the following year and set off against the profits and against the same business, profession or vocation under section 24(2) has to be determined by the Income Tax Officer who deals with, the assessment of the subsequent year. It is for the Income Tax Officer dealing with the assessment in the subsequent year to determine whether the loss of the previous year may be set off against the profits of that year. A decision recorded by the Income Tax Officer who computes the loss in the previous year under section 24(3) that the loss cannot be set off against the income of the subsequent year is not binding on the assessee.”

  1. As could be seen Form the above, the Hon’ble Apex Court held that the loss of profits or gains in any year may be carried forward to the following year and set off against the profits and against the same business, profession or vocation under section 24(2) has to be determined by the assessing officer who deals with, the assessment of the subsequent year. It was held by the Hon’ble Supreme Court that it is for the assessing officer dealing with the assessment in the subsequent year who has to determine whether the loss of the previous year may be set off against the profits of that assessment year. The Hon’ble Supreme Court further held that a decision recorded by the assessing officer who computes the loss in the previous year that the loss cannot be set off against the income of the subsequent year is not binding on the assessee.
  2. Following this decision of the Hon’ble Supreme Court, the Chandigarh Bench of the Tribunal in the case ofRajiv Gupta v. ITO (2008) 114 ITD 346 (Chd) : 2008 TaxPub(DT) 0588 (Chd-Trib) held that, the assessing officer was justified in refusing set off of the long-term capital loss suffered in assessment year 1996-97, in assessment year 1997-98 as well as in assessment year 1999-2000. It was observed by the Tribunal that there was a glaring and patent mistake committed by the assessing officer originally while making the assessments for the said assessment years under section 143(3) of the Act which was rightly modified, the assessment orders by rectifying the mistake of law by denying set off of long-term capital loss claimed by the assessee. The facts in this case were that the assessee claimed carry forward of long-term capital loss of assessment year 1996-97 in its return of income filed belatedly. This loss was set off during the assessment year 1997-98 and assessment year 1999-2000 by the assessee in the return of income filed. The assessing officer originally while completing the assessments under section 143(3) of the Act allowed the claim for set off. However, subsequently by passing rectification order under section 154 of the Act. Assessing officer denied the claim for set off which was upheld by the Tribunal, relying on the decision of the Hon’ble Supreme Court in the case of CIT v. Manmohan Das (supra) wherein it has been held that the claim of the assessee has to be examined by the assessing officer in the year in which such claim for set off was made by the assessee in the return of income. Following the decision of the Hon’ble Apex Court, the Tribunal in this case decided the appeals against the assessee.
  3. The ratio of the decision of the Hon’ble Supreme Court in the case ofCIT v. Manmohan Das (supra) applies squarely to the facts of the assessee’s case. On a reading of the Tribunal order in ITA No. 5760/Mum/2009, dated 5-6-2013 passed for the assessment year 2006-07 wherein the claim for carry forward of losses were denied invoking provisions of section 79 of the Act, we observed that the decision of the Hon’ble Supreme Court in CIT v. Manmohan Das (supra) was not brought to the notice of the Tribunal and the Tribunal had no occasion to examine the effect of this decision. Therefore, we are of the considered view that in view of the decision of the Hon’ble Supreme Court in the case of CIT v. Manmohan Das (supra) the decision of the Tribunal for the assessment year 2006-07 sustaining the action of the assessing officer in not carrying forward the loss to be set off against the profits of the subsequent years has no relevance and the findings given therein has no application for the assessment year under consideration. We are also of the view that the decision of the Tribunal cannot be considered as a binding precedent as the Tribunal did not consider the decision of the Hon’ble Supreme Court in the case of CIT v. Manmohan Das (supra). In the facts and circumstances, thus respectfully following the decision of the Hon’ble Supreme Court in the case of CIT v. Manmohan Das (supra) we hold that the claim for set off of carry forward of losses prior to assessment years 2006-07 against the profits of the current assessment year, i.e., assessment year 2012-13 vis-a-vis the provisions of section 79 of the Act has to be examined by the assessing officer only in the assessment year in which the assessee claimed such set off of losses in the return of income. In the present case since the assessee has claimed set off of carry forward of losses against the income of the current assessment year, i.e., assessment year 2012-13 and also in the subsequent assessment years this claim of the assessee has to be examined only during the assessment year 2012-13 and subsequent assessment years. Thus, the grounds raised in this regard are restored to the file of the assessing officer who shall decide the implication of section 79 of the Act in the light of our above said findings and observations. The grounds raised are disposed off accordingly.
  4. Ground No. 2 relates to discrepancies in stocks. Assessee has raised following ground in its appeal :–

“2. The learned Assistant Commissioner (Appeals) erred in confirming the order of the learned assessing officer making an addition of Rs. 10,64,880 on account of discrepancies in stocks.

It is submitted that the alleged discrepancies found during the course of search have been duly accounted for in the final accounts for the year. The said addition has resulted in double additions and as such ought to be deleted.”

  1. We have heard rival submissions. We find that pursuant to the search carried under section 132 of the Act in the case of the assessee company on 25-8-2011, search party found certain discrepancies in the stock of coated and polished diamonds. Assessee indeed filed reconciliation explaining the discrepancies and ultimately the search party found that 5.16 carats of diamond and 361.94 grams of gold stood not reconciled.

During the course of assessment proceedings, the assessee had explained that assessee engaged in the business of manufacture and trading of Diamonds, Precious and semi-precious stone studded jewellery and also gold jewellery, the assessee had totally handled 14,103.06 carats of diamond, out of which only 5.16 carats of diamond could not be explained.

Assessee had submitted that this minor difference which contribute to 0.036% of total material handled had arouse on account of weighing error and incidental normal loss. The learned assessing officer however did not agree to this explanation of the assessee and made an estimated addition of Rs. 50,000 towards 5.16 carats of diamond which was also upheld by the learned Commissioner (Appeals).

  1. During the course of assessment proceedings, the assessee had explained that 3,42,130 grams of gold that were handled by the assessee during the year in the regular course of its business, only 361.94 grams of gold could not be reconciled which contribute to 0.105% of the total material handled. The assessee had also given a plausible explanation that this minor difference had arouse on account of recovery from dust from repair centre etc. The learned assessing officer however did not heed to these contentions of the assessee and proceeded to value the stock of gold at the rate of Rs. 2804 per gram and made an addition of Rs. 10,14,880 in the assessment which was upheld by the learned Commissioner (Appeals).
  2. Considering the volume of gold jewellery and diamonds handled by the assessee in the instant case during the year under consideration, the unreconciled stock contributed a very meagre percentage of the total material handled by the assessee, we hold that assessee had given plausible explanation in the facts of the instant case stated supra on which no addition is required to be made. We also find that the explanation given by the assessee was not found to be false or in-genuine before the revenue authorities. Hence we have no hesitation in directing the learned assessing officer to delete the addition made on account of discrepancies in stocks to the tune of Rs. 10,64,880. The grounds raised in this regard are allowed.

ITA No. 2926/MUM/2018 (Assessment Year 2013-14)

  1. Assessee has raised following grounds in its appeal :–

“1. The learned Commissioner (Appeals) erred in confirming the order of the learned assessing officer denying set off of unabsorbed business losses on the ground that carry forward of losses was denied in assessment year 2006-07 invoking the provisions of section 79 of the Act.

The appellant has not claimed any set off of losses in assessment year 2006-07 and as such, the provisions of section 79 of the Act applied in assessment year 2006-07 to deny the carry forward of losses was bad in law.

The appellant has correctly claimed the set off of losses in the current year.

  1. The appellant reserves the right to add, to alter or amend the grounds of appeal.”
  2. Ground No. 1 of grounds of appeal is relating to denying set off of unabsorbed business loss on the ground that carry forward of losses was denied by the assessing officer in assessment year 2006-07 invoking the provisions of section 79 of the Act. This ground is similar to Ground No. 1 of grounds of appeal raised for the assessment year 2012-13. The decision taken therein shall applymutatis mutandis to the appeal for the assessment year 2013-14 also. Thus, the ground raised in this regard is restored to the file of the assessing officer who shall decide the implication of section 79 of the Act in the light of our above said findings and observations given in the appeal for the assessment year 2012-13. The ground raised is disposed off accordingly.
  3. In the result, appeal of the assessee for the assessment year 2012-13 is partly allowed and appeal for the assessment year 2013-14 is allowed for statistical purpose.
  4. Before parting, we noticed that these appeals were heard on 5-2-2020 and the pronouncement is delayed due to lockdown in view of COVID-19 pandemic. The pronouncement is as per Rule 34(5) of Income Tax Appellate Tribunal Rules, 1963 and Hon’ble Bombay High Court decision videOrders, dated 15-4-2020 and 15-6-2020 extending the time bound periods specified by Hon’ble High Court by removing the period under lockdown. This aspect was also dealt with in detail by the Mumbai Bench of the Tribunal in case of DCIT v. JSW Steel vide Order, dated 14-5-2020 in ITA No. 6264/Mum/2018 : 2020 TaxPub(DT) 2142 (Mum-Trib).

Order pronounced on 25-9-2020 as per Rule 34(4) of ITAT Rules by placing the pronouncement list in the notice board.

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