I found the issue.
When I left-click on the tab header "Tracks", the left sidebar opens. There are multiple sources to play from, such as Music, Podcasts, History, Music Explorer, Playlists, Services and Computer.
When I try to delete from Computer, permanent deletion confirmation is shown, whereas when I do it from Music, I get the multiple options (delete from library and computer or only library).
So apparently, I have been using the Computer view for a while.