Mining lease premium: substance over form governs whether salami is capital receipt or advance royalty.

The tax character of salami or premium under a mining lease depends on the substance of the transaction, not the label used in the lease deed. Salami is not income in law, but where the facts show that the premium has been inflated by capitalising future royalty, the taxing authorities may treat the affected portion as revenue receipt. On the stated facts, the sharp increase in salami, reduced royalty, link with the earlier prospecting lease, and comparable lease arrangements supported the view that most of the amount represented advance royalty. Accordingly, only Rs. 20,000 was treated as capital receipt, and the balance of Rs. 2,00,000 was assessed as revenue receipt.

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Issues: Whether the sum of Rs. 2,20,000 received as salami or premium under the mining lease was wholly a capital receipt or wholly a revenue receipt, and whether any part of it was assessable as advance payment of royalty.

Analysis: Salami is not income as a matter of law, but its true character depends on the nature of the grant and the surrounding facts. The form adopted in the lease deed is not conclusive; the substance of the transaction controls. Where the materials show that a premium has been inflated by capitalising future royalty, the taxing authorities may treat that part as revenue receipt. On the facts, the drastic increase in salami, the reduction in royalty, the relation between the earlier prospecting lease and the later mining lease, and the comparable lease transactions furnished sufficient material to conclude that a major portion of the amount represented advance royalty.

Conclusion: The disputed sum was not wholly capital in nature. Rs. 20,000 was held to be capital receipt and not taxable, while the balance of Rs. 2,00,000 was treated as revenue receipt assessable to tax.

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