Facts of the Case

The Revenue filed five appeals before the Delhi High Court under Section 260A challenging the common order of the Income Tax Appellate Tribunal (ITAT) relating to Assessment Years 1989-90, 1993-94, 1997-98, 1999-2000, and 2000-01.

The central dispute arose from the computation of exempt income under Section 10(29) of the Income Tax Act in respect of income earned by Central Warehousing Corporation from warehousing and ICD/CFS operations.

The CIT(A) and ITAT had held in favour of the assessee by concluding that depreciation could not be deducted as an expenditure while computing exempt income, as depreciation was merely an allowance. The Revenue contested this interpretation before the High Court.

 Issues Involved

  1. Whether depreciation constitutes an “expenditure” for the purposes of Section 10(29) of the Income Tax Act?
  2. Whether exempt income under Section 10(29) should be computed after deducting depreciation?
  3. Whether the ITAT was justified in affirming the CIT(A)’s order treating depreciation as an allowance and not expenditure?

 Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue argued that depreciation operates like a business expenditure because it is debited to the profit and loss account and reduces taxable profits.
  • It was contended that for Section 10(29), depreciation should be treated as an expense while computing deductible income.
  • The Revenue attempted to distinguish the Supreme Court ruling in Nectar Beverages Pvt. Ltd. v. DCIT (2009) 314 ITR 314, stating that the judgment dealt specifically with Section 41(1) and balancing charge, and not Section 10(29).

 Respondent’s Arguments (Assessee’s Contentions)

  • The assessee argued that depreciation is not an expenditure but a statutory allowance under the Income Tax Act.
  • Reliance was placed on the Supreme Court’s decision in Nectar Beverages Pvt. Ltd. v. DCIT, wherein depreciation was recognized as neither loss, expenditure, nor trading liability.
  • Reliance was also placed on CIT v. Anand Theatres (2000) 244 ITR 192, where depreciation was explained as diminution in value of a capital asset and not revenue expenditure.

 Court Findings / Court Order

The Delhi High Court dismissed all appeals filed by the Revenue and upheld the orders of the CIT(A) and ITAT.

The Court held that:

  • Depreciation is not an expenditure but an allowance under the Income Tax Act.
  • The Supreme Court in Nectar Beverages Pvt. Ltd. had clearly clarified the legal nature of depreciation.
  • By its inherent nature, depreciation cannot be equated with loss, expenditure, or trading liability.
  • Therefore, for the purposes of Section 10(29), depreciation cannot be deducted as expenditure while computing exempt income.

The Court concluded that no substantial question of law arose for consideration.

 Important Clarification / Legal Principle Settled

  • Depreciation is a statutory allowance and not an expenditure.
  • For tax exemption provisions such as Section 10(29), depreciation cannot reduce exempt income by being categorized as expenditure.
  • The intrinsic legal character of depreciation remains consistent irrespective of the section under which it is examined.

This ruling strengthens the judicial distinction between “allowance” and “expenditure” under tax jurisprudence.

 Sections Involved

  • Section 10(29), Income Tax Act, 1961 – Exemption in respect of income derived from warehousing
  • Section 32, Income Tax Act, 1961 – Depreciation allowance
  • Section 41(1), Income Tax Act, 1961 – Remission or cessation of trading liability
  • Section 41(2), Income Tax Act, 1961 (as applicable historically) – Balancing charge
  • Section 260A, Income Tax Act, 1961 – Appeal to High Court

         Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:4118-DB/SMD01082017ITA5842017.pdf

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