CIT v Harprasad and Co

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.