GUJARAT AMBUJA CEMENTS LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX
[Citation -2005-LL-0603-1]

Citation 2005-LL-0603-1
Appellant Name GUJARAT AMBUJA CEMENTS LTD.
Respondent Name ASSISTANT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 03/06/2005
Assessment Year 1988-89
Judgment View Judgment
Keyword Tags disallowance of depreciation • new industrial undertaking • entertainment expenditure • share application money • commercial production • pre-operative period • plant and machinery • revenue expenditure • capital expenditure • deeming provision • electricity board • capitalized value • trading operation • trial production • advance payment • interest income • annual report • original cost • wear and tear • indirect cost • cement plant • raw material • actual cost • written off • book value • new plant • pooja
Bot Summary: From the details of expenditure on technical conference held abroad, we find that most of the expenditure was incurred on travelling, accommodation and other miscellaneous expenses leaving a small portion towards hotel expenses. The AO, thereafter took the view that expenditure is to be allowed as revenue expenditure. The expenditure of Rs. 101.32 lakhs cannot be treated as expenditure pertaining to previous year as power was utilised for commercial production in October, 1986 which pertains to the previous year relevant to the asst. The Tribunal held that the expenditure did not relate to the year under appeal and further that expenditure was of capital nature. As the expenditure was incurred in the financial year 1985-86 and installation was also complete in same financial year, it can only be treated as pre-operative expenditure, even though, it was of revenue nature. Since the assessee is not the owner of plant and machinery, i.e., power lines and transmission towers for supply of electricity, the expenditure was rightly not treated as capital by the AO. However, all the Revenue expenditure incurred in pre-operative/pre-production period need to be capitalised as held in Madras Fertilisers Ltd. vs. CIT 121 CTR 398: 209 ITR 174, CIT vs. Madras Fertilisers Ltd. 238 ITR 672, CIT vs. Ashoka Cements Ltd. 186 ITR 443 and also in Challapalli Sugars Ltd. vs. CIT 1974 CTR 309: 98 ITR 167 that pre-operative expenses can be capitalised. We confirm the order of CIT(A) who has held that the impugned expenditure is revenue expenditure allowable under s. 37(1).


This is appeal filed by assessee against order of CIT(A) for asst. yr. 1988-89 raising several grounds therein. They are being disposed of sequentially as under: (1) We have heard learned counsel for assessee and learned Departmental Representative and also considered material on record. (2) first ground is regarding addition of Rs. 29,000 about disallowance of set off of interest received on share application money (over subscription) against share issue expenses. This issue is covered by decision of Mumbai Tribunal in Dy. CIT vs. XLO GWB Cardon Shaft Ltd. [IT Appeal No. 6113 (Bom) of 1995 and IT Appeal No. 2931 (Mum.) of 1998], in favour of assessee. As per s. 69(4) of Companies Act, 1956 assessee was required to keep amount received on share application money in separate bank account until share allotment was over. Thus, there was direct nexus between interest income earned and share issue expenses. Decision of Hon ble Supreme Court in CIT vs. Bokaro Steels Ltd. (1999) 151 CTR (SC) 276: (1999) 236 ITR 315 (SC) would be applicable and set off has to be allowed. Accordingly, this issue is decided in favour of assessee. This ground is, therefore, allowed. 3. Second ground is regarding disallowance of expenditure of Rs. 1,43,341 on gifts and presentations, made by AO under Rule 6B. This issue is decided by t h e Tribunal for subsequent assessment years in assessee s own case in assessee s favour in following orders: (i) ITA No. 2690/B/1993, vide its order dt. 20th Dec., 2002 1989-90. (ii) ITA No. 2419/B/1994 vide its order dt. 4th Aug., 2003 1990-91. (iii) ITA No. 4034/M/1996 vide its order dt. 7th March, 2005 1991-92. Accordingly, facts and circumstances remaining same, we allow this ground of assessee in its favour. third ground is regarding disallowance of 50 per cent of expenditure on technical conference of stockists, as entertainment expenditure. While dealing with this issue in asst. yr. 1989-90 in ITA No. 2690/M/1993 in assessee s own case Tribunal observed as under: "4.5 We have considered rival submissions in light of material presented before us. From details of expenditure on technical conference held abroad, we find that most of expenditure was incurred on travelling, accommodation and other miscellaneous expenses leaving small portion (20,501) towards hotel expenses. hotel expenditure incurred for stockists distributors is, in our opinion, clearly of entertainment nature. In holding this view we are fortified by decision of Hon ble Bombay High Court in case of CIT vs. India Plastics Ltd. (1999) 240 ITR 528 (Bom). Looking to facts that details of miscellaneous expenses of Rs. 37,041 are not on record, we hold that it will meet ends of justice if disallowance out of Rs. 8,70,336 on account of entertainment expenditure is restricted to Rs. 40,000. assessee, therefore, gets relief of Rs. 4,10,000. In absence of details of expenses in respect of dealers/stockists conference conducted in India as well as of housekeeping expenses, we are of opinion that no interference is called for in order of CIT(A). This ground is, therefore, partly allowed with relief of Rs. 4,10,000." Following above decision and facts being similar, it will meet ends of justice if expenditure of Rs. 20,000 is disallowed. Accordingly, assessee gets partial relief and ground is accordingly, partly allowed. fourth ground is regarding disallowance of guesthouse expenses of Rs. 5,06,481. learned Authorised Representative has contended that issue is decided against assessee in assessee s own case by Tribunal in ITA No. 2690/M/1993 vide its order dt. 20th Dec., 2002 for asst. yr. 1989-90. Following above decision of Tribunal, disallowance is confirmed. assessee fails on this ground. fifth ground is regarding disallowance of pooja expenses of Rs. 61,984. According to assessee, issue is covered in its favour by decision of Tribunal in assessee s own case, in ITA No. 2690/M/1993 vide its order dt. 20th Dec., 2002 for asst. yr. 1989-90. We find that this issue is covered in favour of assessee by above decision of Tribunal. In asst. yr. 1989-90, Tribunal allowed temple inauguration expenses except disallowance of Rs. 3 lakhs out of lavish travelling expenses of Rs. 3.8 lakhs on travelling and food. present year expenditure seems to be normal day-to- day expenses on pooja for running temple in vicinity of plant. Accordingly, after considering rival submissions, facts of issue as stated above, and Tribunal s decision referred above, this ground is allowed in favour of assessee. addition so sustained by CIT(A) is deleted. sixth ground is regarding disallowance of Rs. 93,220 being village welfare expenses. This expenditure relates to expenditure towards general village welfare in vicinity of plant. We find that this issue also covered by decision of Tribunal in ITA No. 2690/M/1993 vide its order dt. 20th Dec., 2002 in assessee s own case for asst. yr. 1989-90. Accordingly, following above order, this ground is decided in favour of assessee. appeal of assessee succeeds on this issue. seventh ground is about disallowance of expenditure of Rs. 1,01,31,669 paid for power lines and transmission towers to Gujarat Electricity Board (GEB). According to AO, this expenditure relates to asst. yr. 1987- 88 in which year installation of power lines and transmission towers were completed. facts of case are that assessee for installation of plant and machinery for its cement plant at Ambuja Nagar, Gujarat required 19,000 KV of power, which was not available at that place. GEB had substation at Talala, which was about 30 kms. away from Ambuja Nagar. To get requisite power supply, agreement was reached with GEB, whereby assessee- company was required to make advance totalling to Rs. 1,01,31,669 including Rs. 99,00,000 initially demanded. It was stipulated in agreement executed on 16th Aug., 1985 with GEB that assessee-company will not be owner of transmission lines and supply cables and it will have to start production within three months of installation of power lines. Accordingly, payment was made to GEB which was shown in balance sheet under head "asset power lines" and depreciation thereon was claimed to extent of Rs. 3.62 lakhs. Installation of power lines and transmission towers was completed by June, 1986, trial production was started during August, September, 1986 and commercial production was started from October, 1986 when assessee got full power supply of 19,000 KV. supply of 19,000 KV. However, assessee while filing return of income, claimed this sum as revenue expenditure for asst. yr. 1988-89 (financial year July 1986 to June 1987) on ground that it started commercial production in October, 1986 and therefore, entire expenditure is revenue and allowable in that assessment year. gist of detailed reply given by assessee to AO was as under: (i) power line was required to be kept ready by June/July 1986 by GEB. (ii) GEB gave full power load of 19,000 KVA only in August, 1986. (iii) company could utilise requisite power of 19000 KVA from power lines from month of October, 1986 in which commercial production started. (iv) Further to ensure that power supply made by GEB through power line was utilised within three months of power line made available by GEB. Hence, in order to ensure all above, company had to approach GEB well in advance and made payment also in advance as required by GEB in year 1985-86 itself. Though payment for power line was made in earlier year, it has been expended wholly and exclusively for purpose of commercial production which actually started during accounting year 1986-87 relevant to asst. yr. 1988-89 and hence same should be allowed as deduction in asst. yr. 1988-89. In case of Bharat Stores Ltd. vs. CIT (1968) 70 ITR 651 (Orissa) assessee made certain advances for early planting and supply of sugarcane but suppliers were effected in next following year and hence payments allowed in next year. AO after considering submissions of assessee, disallowed claim by observing as under: (a) assessee gave advance of Rs. 101.32 lakhs to GEB during period 1985-86 relevant to asst. yr. 1987-88. Installation of transmission tower, cable and power lines was completed within 30th June, 1986. fact is also admitted in 5th Annual report 1986-87 under Sch. D. (b) supply of electricity commenced after 30th June, 1986. entire expenditure incurred on erection of power lines related to asst. yr. 1987-88. (c) assessee paid electricity charges for trial run production as well as commercial production after 30th June, 1986, which was separately debited by assessee in P&L a/c and portion of which was capitalised also. (d) advance payment for erection of power lines was made in 1985-86 and installation of power line was also completed during that year. AO, thereafter took view that expenditure is to be allowed as revenue expenditure. As expenses were incurred during asst. yr. 1987- 88, sum is required to be considered in that assessment year only. As there was no commercial production during asst. yr. 1987-88, expenditure cannot be considered as revenue in that assessment year. erection of power lines was made in asst. yr. 1987-88. installation of Transmission lines and cables was completed in asst. yr. 1987-88. But assessee received electricity in asst. yr. 1988-89 for which expenses were charged separately. In view of this, AO disallowed claim of Rs. 1,01,31,669 being not related to asst. yr. 1988-89. CIT(A) considered submissions of learned Authorised Representative and also reasonings of AO and confirmed finding of AO by observing as under: "14.2 I have considered facts of case. I find that AO has correctly analysed facts. There is no doubt that expenditure is allowable as revenue expense since ownership is vest with GEB. There can also be no dispute about fact that expenses on power lines were incurred during asst. yr. 1987-88. They are accordingly required to be considered in that assessment year only. However, since there was no commercial production during that asst. yr. 1987-88 it cannot be allowed as revenue expenses. above finds support from decision in case of Ritz Continental Hotel Ltd. vs. CIT (1978) 114 ITR 550 (Cal). Accordingly, claim of assessee amounting to Rs. 101.32 lakhs being expenditure on installation of power lines cannot be allowed, being not related to year under consideration. disallowance made by AO is, therefore, confirmed." Before us, learned counsel for assessee submitted that: (i) advance of Rs. 101.32 lakhs was given to GEB during period 1985-86 relevant to asst. yr. 1987-88. (ii) company had not commenced commercial production during period 1985-86 and accordingly appellant-company had correctly treated it as revenue expenditure allowable in asst. yr. 1988-89. (iii) expenditure of Rs. 101.32 lakhs cannot be treated as expenditure pertaining to previous year as power was utilised for commercial production in October, 1986 which pertains to previous year relevant to asst. yr. 1988- 89. (iv) With prejudice to our above contentions it is submitted that learned CIT(A) should at least have allowed said expenditure to be capitalised and granted depreciation on same. Since he has confirmed same as revenue expenditure pertaining to previous year. In support of above submissions, learned counsel for assessee relied on following judgments: (1) CIT vs. Gujarat Mineral Development Corpn. (1981) 20 CTR (Guj) 73: (1981) 132 ITR 377 (Guj) confirmed in CIT vs. Gujarat Mineral Development Corpn. (GMDC) (2001) 169 CTR (SC) 117: (2001) 249 ITR 787 (SC). (2) Bharat Stores Ltd. vs. CIT (1968) 70 ITR 651 (All). We have heard rival submissions and considered facts and material o n record. We find that Department does not dispute that it is revenue expenditure. Only dispute is as to when it should be allowed. decision of Hon ble Gujarat High Court in GMDC (supra) is on slightly different facts. In that case, GMDC incurred expenditure of Rs. 20.46 lakhs paid to GEB (Gujarat Electricity Board), which represented fifty per cent of total amount spent by GEB for laying electric cables and electric supply transmission lines etc. for beneficiation plant to enable GMDC to separate waste material from useful minerals. Lines, cables and transmission lines were to be property of GEB. In accounting year 1967-68, GMDC paid Rs. 19 lakhs by way of advance to GEB and in subsequent years one seventh of total amount of Rs. 20.46 lakhs was shown as revenue expenditure, written off by way of expenditure. installation was complete in December, 1968. GMDC claimed amount of Rs. 20.46 lakhs as revenue expenditure for asst. yr. 1969-70. Tribunal held that expenditure did not relate to year under appeal and further that expenditure was of capital nature. Hon ble Gujarat High Court on these facts held that business was being carried on previously by assessee, beneficiation plant only enabled GMDC to carry it more efficiently. advantage was not in capital field and hence expenditure, although its benefit would endure for number of years was of revenue nature. As installation was completed in December, 1969, that is during previous year relevant to asst. yr. 1969-70, expenditure of Rs. 20.46 lakhs was allowable in asst. yr. 1969-70 only. When matter travelled to Hon ble Supreme Court at instance of Department, Hon ble Supreme Court in GMDC s case (supra) observed as under: "In view of decision of this Court in case of CIT vs. Elecon Engineering Co. Ltd. (1987) 64 CTR (SC) 101: (1987) 167 ITR 639 (SC), these appeals are dismissed." Hon ble Supreme Court s decision in CIT vs. Elecon Engineering Co. Ltd. (1987) 64 CTR (SC) 101: (1987) 167 ITR 639 (SC) related to computation of relief under s. 84 of IT Act, 1961 in relation to new industrial undertaking, holding that profits of computation period has necessarily to be added due to deeming provision under rule 19(5). Thus, question about determination of year for allowability of expenditure was not before Hon ble Supreme Court in Elecon Engg. Co. Ltd. s case (supra). In GMDC s case (supra), there were two questions before Hon ble Gujarat High Court Gujarat Mineral Development Corpn. s case (supra). One was about year of allowability of expenditure incurred on installing pipelines and other was computation of capital under s. 80-J, wherein it was held that amount not immediately required for under s. 80-J, wherein it was held that amount not immediately required for business and kept in short time fixed deposit was includible in computing capital under s. 84 (new 80-J). Thus, it appears that Hon ble Supreme Court had decided and confirmed decision of Hon ble Gujarat High Court on second issue. There is apparently no deliberation on year of allowability. In GMDC s case (supra), there was running business and payment was made to GEB to carry on business more efficiently. Since payment was incurred during course of running business, it was considered to be revenue in nature and was allowed. In present case, new plant and machinery by way of new cement plant was being installed which ultimately became operative only w.e.f. October, 1986 when commercial production started. As expenditure was incurred in financial year 1985-86 and installation was also complete in same financial year, it can only be treated as pre-operative expenditure, even though, it was of revenue nature. All pre-operative or pre- production expenditure, which have direct or indirect nexus with set up of plant and machinery has to be capitalised. Since assessee is not owner of plant and machinery, i.e., power lines and transmission towers for supply of electricity, expenditure was rightly not treated as capital by AO. However, all Revenue expenditure incurred in pre-operative/pre-production period need to be capitalised as held in Madras Fertilisers Ltd. vs. CIT (1994) 121 CTR (Mad) 398: (1994) 209 ITR 174 (Mad), CIT vs. Madras Fertilisers Ltd. (1999) 238 ITR 672 (Mad), CIT vs. Ashoka Cements Ltd. (1990) 186 ITR 443 (Cal) and also in Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309: (1975) 98 ITR 167 (SC) that pre-operative expenses can be capitalised. question now arises is as to whether assessee is entitled for any depreciation on such capitalised expenditure as claimed by him. In above referred cases, it has also been held that assessee is entitled for depreciation on such pre-operative expenses capitalised. Respectfully following above decisions, we direct AO to allow depreciation to assessee on this capitalised pre-operative expenses. We find that assessee received some refund of Rs. 1,52,726.75 from GEB vide ref. No. OM/Com/F.P....17W/637/5833, dt. 26th Sept., 1990. amount paid to GEB is Rs. 99,00,000, which should be capitalised and depreciation be allowed thereon this year. Ground No. 8 relates to disallowance of miscellaneous expenditure as under: (i) Quarry development expenses of Rs. 25,69,139, (ii) Market research and development expenses of Rs. 8,18,712 and (iii) Advertisement for corporate image of Rs. 8,53,980. According to learned counsel, these items are covered by following decisions: "(a) ITA No. 2690/M/1993 vide its order dt. 20th Dec., 2002 for asst. yr. 1989-90 (b) ITA No. 2419/M/1994 vide its order dt. 4th Aug., 2003 for asst. yr. 1990- 91 (c) Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113: (1980) 124 ITR 1 (SC) (d) CIT vs. Ananda Bazar Patrika (P) Ltd. (1990) 81 CTR (Cal) 356: (1990) 184 ITR 542 (Cal) (e) CIT vs. Berger Paints (India) Ltd. (2002) 174 CTR (Cal) 269: (2002) 254 ITR 503 (Cal)" Vide para 17.3 of its order dt. 20th Dec., 2002, Tribunal for asst. yr. 1989-90 in ITA No. 9690/M/1993 held as under: "17.3 We have considered rival submissions in light of material placed before us. It is fact that assessee s business had started during preceding year and it had already started extracting limestone from mines. impugned expenses are to be incurred on year to year basis and cannot be said to be incurred prior to commencement of business. Since business had already commenced, same will not be covered by provisions of s. 35(1). Further, said expenditure was incurred for extracting raw material and not for acquiring any asset of enduring benefit or advantage. In this context, we rely on decision of apex Court in case of Empire Jute Co. Ltd. (supra) wherein it was held that if advantage consists merely in facilitating assessee s trading operation, expenditure would be on revenue account. Respectfully, following said decision and other decisions relied upon by learned counsel, we hold that said expenditure can in no way be treated as capital in nature. We, therefore, confirm order of CIT(A) who has held that impugned expenditure is revenue expenditure allowable under s. 37(1). AO has not discussed issue at all. appeal of Revenue fails on this issue as well." In view of above, quarry development expenses are treated as revenue expenditure and are allowed. assessee succeeds on this ground. Other two expenses, viz., market research and development expenses of R s . 8,18,712 and advertisement of corporate image of Rs. 85,39,801, assessee has placed reliance on three decisions (supra). AO have treated them as capital expenditure and so confirmed by CIT(A) vide paras 15 and 15.1 of his order. Since business of assessee has commenced during this year, expenditure on quarry development expenses, will be treated as revenue expenditure, following decision of Tribunal referred above. Regarding market research and development expenses issue is squarely covered by CIT vs. Ananda Bazaar Patrika (P) Ltd. (1990) 81 CTR (Cal) 356: (1990) 184 ITR 542 (Cal) that expenditure is revenue in nature and allowable. Expenditure on advertising is also held as revenue expenditure in CIT vs. Berger Paints India Ltd. (supra). In view of these decisions, we allow this ground of assessee. Ground No. 9 relating to disallowance of depreciation of office premises in possession and being used for business of company on plea that it is not registered in name of company, issue is decided in favour of assessee by Tribunal in following decisions: "(a) ITA No. 2690/M/1993 vide its order dt. 20th Dec., 2002 for asst. yr. 1989-90 (b) ITA No. 2419/M/1994 vide its order dt. 4th Aug., 2003 for asst. yr. 1990- 91" Following above decisions, issue is decided in favour of assessee. This ground is, therefore, allowed. Ground No. 10 is about disallowance of depreciation on pre-operative expenses capitalized before start of commercial production in October, 1986. CIT(A) while confirming addition gave his observations in paras 17 and 17.1 of his order as under. learned counsel for assessee argued that appellant-company had started commercial production since October, 1986, prior to this it had charged depreciation on some fixed assets, which were put to use before start of commercial production. pre-operative expenses including depreciation on such assets were capitalized. This is in accordance with accounting practices of ICAI. Hence, assessee is entitled for depreciation on these capitalized pre- operative expenses including depreciation. On other hand, learned Departmental Representative relied on orders of AO and CIT(A). After hearing both parties, we are of view that assessee deserves to succeed. reasons are firstly: there is no dispute on proposition that pre- operative expenses related directly or indirectly to setting up of plant and machinery or building can be capitalized. Support is derived from decision of Hon ble Rajasthan High Court in CIT vs. Anil Steel Industries Ltd. (1991) 97 CTR (Raj) 113: (1992) 193 ITR 124 (Raj), CIT vs. Bharat Agri. Co. (1999) 151 CTR (Pat) 219: (1998) 233 ITR 643 (Pat). Once pre-operative expenses having direct or indirect nexus with setting u p of business or installation of machinery can be capitalized, then there is no reason why they are not entitled for depreciation as per rules. It cannot be case that capitalisation is permissible, direct or indirect cost can be added to actual cost of plant and machinery or building but depreciation cannot be allowed in post operative period, if otherwise permissible under rules to that particular block of assets to which such pre-operative expenses have been added. Secondly, depreciation claimed in pre-operative period is also part of pre- operative expenses. If certain assets are used in pre-operative period to assist setting up of plant and machinery, then depreciation on such "assisting assets" is rightly debitable to pre-operative expenses like any other direct or indirect cost. This will be fully in accordance with accounting principles. Wear and tear of such "assisting assets" is normal phenomenon in pre-operative period and hence depreciation thereon is rightly part of "pre-operative expenses". Thirdly, it is incorrect to say that there is double claim of depreciation, once in pre-operative period and other after capitalization in post-operative period. It is because, relevance of claim of depreciation is against revenue. That claim of depreciation is beneficial when there is profit chargeable to tax. Pre-operative expenses and depreciation are never claimed against revenue in pre-operative period. It has neither been claimed as such nor allowed by Department in pre-operative period. claim or charge is only for accounting purposes. Such "assisting assets" are credited by depreciation and pre-operative expenses are debited by amount of depreciation. Thus, where "assisting asset" has limited life span, it may get exhausted (in terms of value) before plant starts operative. Therefore, they rightly become part of capitalized pre-operative expenses like any other direct or indirect cost. Admittedly, there is no case of Revenue that pre-operative expenses and depreciation so added have no direct or indirect nexus with setting up of plant, machinery or building. As depreciation on "assisting assets" have direct nexus with setting up of plant and machinery and building and are part of pre- operative expenses for capitalization. accounting principles of ICAI permit claim of depreciation in post-operative period on such capitalized pre- operative expenses including depreciation. relevant para from guidance notes issued by ICAI is as under: "17.18 It is recommended that depreciation should be charged during construction period on any items of fixed assets or temporary construction facilities used during period of construction. Such depreciation may be charged either by applying normal depreciation rates to original cost of such assets or, in alternative, depreciation may be charged indirectly by capitalizing difference between original cost of equipment or facilities and sale or scrap value thereof at end of construction. latter method is particularly appropriate in case of special construction equipment and temporary construction facilities. In either case, depreciation provided during construction period should ordinarily be treated as part of indirect construction cost and capitalized accordingly. If any item of fixed assets used during construction period is retained by project for use after production, residual book value of such assets should be depreciated in normal way after commencement of production." Finally, so long as charging of depreciation in pre-operative period and bringing it back by capitalisation does not increase actual cost, there cannot be any objection to this accounting. Even otherwise, actual cost of "assisting asset" installed in pre-operative period are eligible for claim of depreciation in post-operative period. In view of above, we hold that assessee is entitled to depreciation as per rules on capitalized value of pre-operative expenses including depreciation charged on assets used in pre-operative period. Ground No. 11 requires no interference as penalty proceedings are independently initiated and adjudicated. They are to be decided as per facts and law related to them. Hence this ground is rejected. Ground No. 12 is general and hence, it is also rejected. In result, appeal of assessee is partly allowed as indicated above. *** GUJARAT AMBUJA CEMENTS LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX
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