Let me start by apologizing. This has most certainly been asked before but I did try to find the answer here on the forum. No luck though. So here it goes!
1) What is the proper way of updating your addon files?
I noticed my addon had a bug so I fixed it and wanted to upload my updated version. What I did was delete the old one since File Management -> Edit file only allows for editing of the file information not the actual file. Or am I missing something? Deleting the file resulted in addon disappearing from Curse.com which is not what I expected. I wanted the old version to still be available while the new one got approved. How do I got about this?
2) Does addons uploaded via SVN really skip the approval queue?
1) The same way you uploaded the last file:
Project page > Project Management menu > "Upload file"
2) Yes, because the SVN only allows "safe" file types. The primary reason for putting manual uploads into the approval queue is to check for viruses or other malware, which the SVN repo won't accept, so anything packaged directly from the SVN is assumed to be safe, and does not require manual approval.
There is -some- legitimacy to have older versions available, particularly if the new version implements some feature that some people might not want or like. Another possible reason that has occurred in the past is that some regions such as China WoW may be a few months behind in patching and may require an older version of the addon until then.
If people don't want or like a new feature, they can not download the update, or they can simply not use the feature, or they can go find another addon whose author pledges not to add any new features, or they can write their own addon. People using older versions on purpose just opens the door for even more useless bug reports.
Patch-related updates do have some legitimacy, and when I post an update for a patch, I usually do leave the previous version up for a while. For all other updates, though, I'd rather the old version no longer be available.