Facts of the Case

The Revenue preferred five appeals under Section 260A of the Income Tax Act against a common order passed by the Income Tax Appellate Tribunal (ITAT) concerning multiple assessment years. The principal dispute pertained to the methodology for computing deductible income under Section 10(29) of the Act.

The Assessing Authority contended that depreciation should be deducted as expenditure while calculating exempt income. However, both the Commissioner of Income Tax (Appeals) and the ITAT accepted the assessee’s position that depreciation, being an allowance and not expenditure, should be excluded while determining deductible income under Section 10(29).

Issues Involved

  1. Whether depreciation is to be treated as an expenditure while computing exempt income under Section 10(29) of the Income Tax Act?
  2. Whether the ITAT erred in affirming the CIT(A)’s view that depreciation is an allowance and not an expenditure?
  3. Whether gross receipts from warehousing and ICD/CFS should be considered for deduction under Section 10(29)?

Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue argued that depreciation operates like any other business expense and reduces the taxable income of the assessee.
  • It was contended that for the purpose of Section 10(29), depreciation should be considered as expenditure.
  • The Revenue attempted to distinguish the Supreme Court ruling in Nectar Beverages Pvt. Ltd. v. DCIT, asserting that the said judgment was rendered in the context of Section 41(1) and not Section 10(29).

Respondent’s Arguments (Assessee’s Contentions)

  • The assessee submitted that depreciation is merely an allowance and not an expenditure.
  • Reliance was placed on the Supreme Court’s judgment in Nectar Beverages Pvt. Ltd. v. DCIT (2009) 314 ITR 314, wherein depreciation was clarified as neither loss nor expenditure nor trading liability.
  • The assessee further relied on CIT v. Anand Theatres (2000) 244 ITR 192, where depreciation was described as diminution in value of capital assets for determining real income.

Court Findings / Order

The Delhi High Court upheld the findings of the CIT(A) and ITAT and dismissed the Revenue’s appeals. The Court held that:

  • Depreciation, by its intrinsic nature, is not an expenditure but an allowance.
  • The principle laid down by the Supreme Court in Nectar Beverages was applicable for understanding the true nature of depreciation.
  • Therefore, for purposes of Section 10(29), depreciation cannot be deducted as expenditure while computing exempt income.
  • No substantial question of law arose for consideration under Section 260A.

Final Outcome: Revenue’s appeals dismissed.

Important Clarification

This judgment clarifies that depreciation retains its character as an allowance irrespective of the provision under which it is considered. It cannot be equated with expenditure merely because it impacts business income computation. This distinction is significant for exemption provisions under the Income Tax Act.

Sections Involved

  • Section 10(29) – Exemption in respect of income derived from warehousing
  • Section 32 – Depreciation allowance
  • Section 41(1) – Remission or cessation of trading liability
  • Section 41(2) – Balancing charge (historical context)
  • Section 260A – 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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