Facts of the Case

The Revenue preferred five appeals before the Delhi High Court challenging a 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 dispute arose from the computation of exempt income under Section 10(29), where the assessee, Central Warehousing Corporation, claimed that depreciation should not be deducted as expenditure for determining deductible income from warehousing and ICD/CFS activities.

The Commissioner of Income Tax (Appeals) and the ITAT accepted the assessee’s position, relying upon the Supreme Court ruling in CIT v. Nectar Beverages Pvt. Ltd. and holding that depreciation is an allowance and not expenditure. The Revenue challenged this interpretation before the High Court.

 Issues Involved

  1. Whether depreciation constitutes “expenditure” for the purpose of computing exempt income under Section 10(29)?
  2. Whether the ITAT erred in excluding depreciation while computing deductible income under Section 10(29)?
  3. Whether depreciation can be treated merely as an allowance instead of business expenditure?

 Petitioner’s Arguments (Revenue’s Contentions)

The Revenue contended that:

  • Depreciation is similar to business expenditure and is debited to the profit and loss account.
  • Since depreciation reduces taxable profits, it should be treated as expenditure for Section 10(29) computation.
  • The Supreme Court judgment in Nectar Beverages Pvt. Ltd. v. DCIT was distinguishable because it dealt with Section 41(1) and balancing charge, not Section 10(29).

 Respondent’s Arguments (Assessee’s Contentions)

The assessee argued that:

  • Depreciation is not an expenditure but a statutory allowance.
  • The Supreme Court in Nectar Beverages had clearly recognized that depreciation is neither loss, expenditure, nor trading liability.
  • Therefore, while computing exempt income under Section 10(29), depreciation cannot be deducted as expenditure.

 Court Findings / Observations

The Delhi High Court examined the Supreme Court ruling in Nectar Beverages and observed that the Apex Court had categorically held that depreciation, by its nature, is not expenditure or loss.

The Court also relied upon CIT v. Anand Theatres, wherein the Supreme Court clarified that depreciation represents diminution in the value of a capital asset and is intended to reflect the true picture of business income.

The High Court held that:

  • Depreciation retains its independent statutory character as an allowance.
  • It cannot be equated with expenditure merely because it is debited in accounts.
  • The ITAT and CIT(A) committed no legal error in excluding depreciation from expenditure while computing exempt income under Section 10(29).

 Court Order / Final Decision

The Delhi High Court dismissed all appeals filed by the Revenue and held that:

For the purpose of Section 10(29) of the Income Tax Act, depreciation is an allowance and not expenditure; therefore, it cannot be deducted while computing exempt income.

 Important Clarification (Key Legal Principle)

This judgment clarifies that:

  • Depreciation is a statutory allowance and not business expenditure.
  • The character of depreciation remains the same across provisions unless specifically altered by statute.
  • For tax exemption computations under Section 10(29), exempt income is to be computed without treating depreciation as expenditure.

 Sections Involved

  • Section 10(29) – Exemption of income from warehousing activities
  • Section 32 – Depreciation allowance
  • Section 41(1) – Remission or cessation of trading liability
  • Section 41(2) – Balancing charge (as discussed in judicial interpretation)
  • Section 260A – Appeal before High Court
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