Capital receipt treatment for prospecting licence payments upheld where exclusive mining rights were transferred for consideration.

Short-term prospecting licence payments for bauxite were treated as capital receipts because the licences conferred a sole and exclusive right to enter, prospect, mine, quarry, bore, dig, prove and remove bauxite, subject only to limited sampling and protective obligations. The consideration was for parting with a substantive right in the capital asset itself, not for periodic use of the asset. On that basis, the receipts were characterised as salami or premium on capital account and were not taxable as revenue receipts.

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Issues: Whether the sums received under short-term prospecting licences for bauxite were capital receipts or revenue receipts and therefore taxable as income.

Analysis: The licences conferred a sole and exclusive right to enter upon the lands, prospect, search, mine, quarry, bore, dig, prove and remove bauxite, with only a limited right to take samples up to a specified quantity and with ancillary obligations protective of the land. The payments were not periodic compensation for the mere use of capital assets, but were consideration for parting with a substantive right in the capital asset itself. On that footing, the receipts had the character of salami or premium paid for acquisition of rights and were on capital account.

Conclusion: The receipts were capital receipts and not revenue receipts; the question was answered in favour of the assessee.

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