The distinctive ability to remember their original form after partial or complete deformation makes shape memory polymers remarkable materials for several engineering and biomedical applications. In the present work, the development of a polycaprolactone based toughened shape memory polyurethane biocomposite promoted by in situ incorporation of chitosan flakes has been demonstrated. The chitosan flakes were homogeneously present in the polymer matrix in the form of nanoflakes, as confirmed by the electron microscopic analysis and probably developed a crosslinked node that promoted toughness ( > 500% elongation at break) and led to ~130% increment in ultimate tensile strength, as analyzed using a universal testing machine. During a tensile pull, X-ray analysis revealed the development of crystallites, which resulted from a stress induced crystallization process that may retain the shape and melting of the crystallites stimulating shape recovery (with ~100% shape recovery ratio), even after permanent deformation. The biodegradable polyurethane biocomposite also demonstrates relatively high thermal stability ( at ~360 ). The prepared material possesses a unique shape memory behavior, even after permanent deformation up to > 500% strain, which may have great potential in several biomedical applications.