Facts of the Case

The Revenue preferred five appeals before the Delhi High Court under Section 260A against the common order of the Income Tax Appellate Tribunal for multiple assessment years (1989-90, 1993-94, 1997-98, 1999-2000, and 2000-01).

The dispute arose from the determination of exempt income under Section 10(29), where the assessee, Central Warehousing Corporation, claimed that depreciation should not be treated as expenditure while computing deductible income from warehousing and ICD/CFS receipts.

The CIT(A) and ITAT accepted the assessee’s contention by relying upon the Supreme Court judgment in Nectar Beverages Pvt. Ltd. v. DCIT (2009) 314 ITR 314, holding that depreciation is not in the nature of expenditure. Aggrieved by this, the Revenue approached the High Court.

 Issues Involved

  1. Whether depreciation constitutes an expenditure for the purpose of computing exempt income under Section 10(29) of the Income Tax Act?
  2. Whether the ITAT was justified in affirming the CIT(A)’s order excluding depreciation from deductible expenditure?
  3. Whether any substantial question of law arose from the order of the ITAT?

 Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue contended that depreciation is similar to any business expenditure debited to the profit and loss account.
  • It was argued that depreciation reduces taxable profits and therefore should be considered an expense while computing exempt income under Section 10(29).
  • The Revenue attempted to distinguish Nectar Beverages Pvt. Ltd. v. DCIT, stating that the said decision was rendered in the context of Section 41(1) and not Section 10(29).

 Respondent’s Arguments (Assessee’s Contentions)

  • The assessee argued that depreciation is merely a statutory allowance and not expenditure.
  • Reliance was placed on Nectar Beverages Pvt. Ltd. v. DCIT, wherein the Supreme Court clarified the legal nature of depreciation.
  • Further reliance was placed on CIT v. Anand Theatres (2000) 244 ITR 192, wherein the Supreme Court recognized depreciation as diminution in value of a capital asset and not expenditure.

Court Findings / Observations

The Delhi High Court examined the Supreme Court’s observations in Nectar Beverages Pvt. Ltd. and held that depreciation, by its intrinsic nature, is neither loss, expenditure, nor trading liability.

The Court further observed that the legal character of depreciation does not change merely because it is considered under a different provision of the Act.

The Court reaffirmed that depreciation represents diminution in the value of a capital asset and is therefore an allowance, not an expenditure.

 Court Order / Final Decision

The Delhi High Court held that:

  • For the purposes of Section 10(29), depreciation cannot be treated as expenditure.
  • Depreciation is a statutory allowance.
  • The orders of the CIT(A) and ITAT were legally correct.
  • No substantial question of law arose for consideration.

Accordingly, all Revenue appeals were dismissed.

 Important Clarification / Legal Principle Settled

This judgment clarifies that for exemption computation under Section 10(29), depreciation is not to be deducted as expenditure. It remains an allowance representing diminution in the value of capital assets.

The ruling reinforces the distinction between expenditure and allowance under the Income Tax Act.

 Sections Involved

  • Section 10(29), Income Tax Act, 1961 – Exemption relating to income from warehousing activities
  • Section 32, Income Tax Act, 1961 – Depreciation allowance
  • Section 41(1), Income Tax Act, 1961 – Recovery of expenditure/loss/trading liability
  • Section 260A, Income Tax Act, 1961 – Appeal before 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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