Taxation lawCapital vs revenueSupreme Court of India

CIT v Harprasad and Co

(1975) 99 ITR 118 (Supreme Court)19751 min read
The case in brief30-second read
Facts
Harprasad and Co held a right to acquire shares in a company under a managing agency agreement. The managing agency system was being abolished; the company terminated the arrangement.
Issue
Whether compensation for surrender of a right to acquire shares is a revenue or capital receipt
Held
The right to acquire shares is a chose in action / capital asset.
Principle
A receipt that is capital in nature does not become income merely because it is received in the course of business; the character of the receipt must be determined.
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Facts

  • Harprasad and Co held a right to acquire shares in a company under a managing agency agreement
  • The managing agency system was being abolished; the company terminated the arrangement
  • Harprasad received compensation for relinquishing its right to obtain the shares
  • The CIT treated the receipt as revenue income (profit of the business)
  • The assessee contended it was a capital receipt (surrender of a capital asset)

Issues

  1. Whether compensation for surrender of a right to acquire shares is a revenue or capital receipt
  2. Whether a "right to obtain shares" is a capital asset

Held

  • The right to acquire shares is a chose in action / capital asset
  • Its relinquishment gives rise to a capital receipt, not trading income
  • The compensation does not represent profits from carrying on business; it represents the price of a capital right
  • The receipt is capital in nature

Ratio decidendi

The tree and fruit test applies: if what is surrendered is the tree (the capital asset itself), the receipt is capital. If what is surrendered is the fruit (income from operating the asset), the receipt is revenue. A right to acquire shares is the tree; compensation for giving it up is capital. The same logic applies to any one-time payment for extinguishment of a capital right.

Exam use

How to use it in an answer

  • Cite in Tax Law questions on the revenue vs capital receipt distinction and the "tree and fruit" test
  • Relevant for questions on compensation for relinquishment of rights, managing agency abolition
  • Pair with CIT v Kulu Valley Transport (1970) for the trading receipt vs capital receipt framework

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Citation

CIT v Harprasad and Co (1975) 99 ITR 118 (Supreme Court)

Reported: (1975) 99 ITR 118 (Supreme Court). This is an educational summary, not the judgment itself. Cite the reported version in professional or academic work.