The Mumbai bench, Income Tax Appellate Tribunal ( ITAT ) while allowing the deduction claimed by the HDFC Bank under Section 36(1)(vii) of the Income Tax Act, 1961 held that bead debts arising out of the business of credit card services is part of banking activities. During the assessment proceedings of the assessee HDFC Bank Ltd AO noticed that the assessee has claimed Rs. 375,10,36,088/- as write off of bad debts towards credit card.

The AO did not allow the claim of the assessee for the reason that the credit card bad debts were never taken into account for computing the income of the assessee and that the same does not represent the money lent in the ordinary course of business of banking. When the assessee filed appeal against the order of AO before the CIT(Appeal) who allowed the claim and held that the services provided by the assessee is a banking service which is part of the lending activity Aggrieved by the order, the revenue filed an appeal before the tribunal.

During the adjudication the Biswanath Das, Department representatives argued that the credit card written off as bad debts cannot be allowed as deduction under section 36(1)(vii) of the Income Tax Act for the reason that the assessee accounts for income from credit card only to the extent of commission and not the entire amount paid towards credit cards. Yogesh Thar,counsel for assessee argued that the assessee has to settle to the Merchants for the purchases made by the credit card holder and therefore, the amount which is irrecoverable from the customers should be allowed as incurred in the normal course of business of the assessee.

After considering submission of both parties the two member  bench comprising Kuldip Singh, (Judicial Member) & Padmavathy S, (Accountant Member) held that  bad debts arising out of the business of credit card services is part of the banking activities and the loss arising on account of unrecovered balance is arising out of the normal course of banking business. Accordingly, the same shall be allowed as a deduction under section 36(1)(vii) of the Income Tax Act. Therefore the bench dismissed  the ground raised by the revenue.