He put Rs 2.61 crore in online rummy and poker but lost Rs 28 lakh; taxman sought tax on Rs 2.33 crore, why ITAT Bangalore rejected demand

You play online games - you win some money and you lose some money. How does the taxation on your wins and losses work? The Income Tax Appellate Tribunal (ITAT) Bangalore has recently ruled that tax on online real-money gaming should be calculated on net winnings rather than on the gross amount credited as winnings.The ruling came in the case of Channappa, a resident of Doddakallasandra, Bengaluru, who put more than Rs 2 crore into online rummy and poker but ultimately suffered a net loss of Rs 28 lakh.Channappa had filed his income tax return (ITR) declaring a total income of Rs 4.32 lakh. This included rental income from a house, business income and income from other sources. His return was subsequently selected for scrutiny by the Income Tax Assessing Officer, Bangalore, for verification of certain information.What the case is aboutDuring the scrutiny, the tax officer received information that Channappa had played real-money games on the “Rummyculture” and “Gamezy” platforms operated by Gameskraft Technologies Pvt. Ltd, according to an ET report. The information indicated that he had received winnings of Rs 2.33 crore from these gaming activities. This amount had not been disclosed in his ITR.The Income Tax Department had separately carried out a search and seizure operation at the offices of Gameskraft Technologies on March 15, 2022. During the operation, the department collected information relating to winnings earned by players on the company’s online gaming platforms.Gameskraft operated the Rummyculture and Gamezy portals, where users could participate in games including deal, pool, points, tournaments, fantasy games, rummy and poker, all involving real-money transactions.The Income Tax Assessing Officer (AO) took the view that players used both real money and bonus amounts to participate in these games. According to the AO, the amount credited to a player’s wallet after the company deducted its commission represented that player’s gross winnings, the ET report said.The tax officer illustrated his interpretation with an example. If two players each put in Rs 100 and the gaming company deducted a 10% commission, Rs 180 would remain and be credited to the winning player’s account. The AO considered this entire Rs 180 to be the player’s gross gaming winnings.On this basis, the AO held that the full amount credited to the winning player should be treated as taxable gaming income. The officer therefore concluded that winnings from online real-money games were taxable as income from other sources under Section 56(2)(ib).The AO further noted that Section 115BB provides for a flat rate of tax on winnings from lotteries, crossword puzzles, races, card games and other games, irrespective of the taxpayer’s normal income-tax slab.The AO also observed that Channappa had not furnished a satisfactory explanation or supporting documents despite receiving tax notices. Based on this, the officer treated the entire Rs 2.33 crore as income earned from winnings in online games and assessed it under the head “Income from Other Sources”.Why did ITAT Bangalore rule in favour of Channappa?Channappa challenged the assessment before the Commissioner of Appeals (CIT A). He pointed to the information furnished by Gameskraft, which showed that his total buy-in amount was Rs 2.61 crore, compared with gross winnings of Rs 2.33 crore.Channappa argued: “...the net result was a loss of Rs 27,99,353.…Once the information received by the AO from Gameskraft itself showed that he had suffered a net loss, there was no justification for taxing the gross winnings as income. …AO’s approach is contrary to the basic principle of taxation that only real income can be taxed.”The CIT (A), however, rejected his appeal and upheld the AO’s assessment. Channappa then approached the ITAT Bangalore. On July 23, 2026, the tribunal ruled in his favour.So what made ITAT rule in favour of tax filer? Chartered Accountant Suresh Surana told ET that the key issue in Channappa’s favour was the transaction data obtained directly from Gameskraft. The information showed that Channappa had made buy-ins totalling Rs 2.61 crore, while his gross winnings stood at Rs 2.33 crore. This meant that, overall, he had incurred a net loss of Rs 27.99 lakh, or around Rs 28 lakh.According to Surana, the Income Tax Department had focused on the gross winnings figure without taking into account the corresponding buy-ins contained in the same set of transaction records.Surana says: “The absence of TDS on any net winnings was also considered by ITAT Bangalore as supporting Channappa’s contention that he had not earned taxable net winnings.”The ITAT Bangalore consequently held that, in the circumstances of this case, the amount that could be brought to tax was the actual net winnings from online gaming, rather than gross credits appearing in a player’s wallet or amounts shown as winnings at different stages of the gameplay.Surana says: “Since Channappa had suffered a net loss and had not earned any real income from online gaming, ITAT Bangalore directed the deletion of the entire addition of Rs 2.33 crore and allowed his appeal.”According to Surana, the ITAT Bangalore found that the approach adopted by the lower authority did not align with the basic meaning of “income” under the Income-tax Act.The tax law is concerned with taxing actual income, rather than simply taxing the gross flow, movement or repeated circulation of money.The tribunal also considered the provisions that were in force before the Finance Act, 2023, particularly Sections 115BB and 194B. Surana noted that both provisions referred to “income by way of winnings”.The ITAT Bangalore also considered the legal framework that was subsequently introduced through the Finance Act, 2023. This included Sections 115BBJ and 194BA, read along with Rule 133.Surana says: “These provisions specifically provide for taxation and deduction of tax at source on “net winnings” from online games after considering deposits, withdrawals, opening balances and closing balances in the user’s gaming account.”The tribunal therefore concluded that the later provisions did not establish an entirely new principle of taxation.Surana said the ITAT Bangalore also relied on CBDT Circular No. 5/2023 dated May 22, 2023, which sets out the mechanism for calculating net winnings from online games.The tribunal further considered the decisions involving the Royal Calcutta Turf Club and Delhi Race Club. In those cases, relating to winnings from horse races, it was held that the amount put in by the participant had to be taken into account when determining the actual winnings.The ITAT Bangalore also disagreed with the Income Tax Department’s reliance on Section 58(4). The tribunal clarified that this provision only prevents expenditure or allowances from being deducted while calculating income arising from winnings.However, before this restriction can be applied, the Income Tax Department must first establish that the taxpayer actually earned “income by way of winnings”.Get the latest Business News and Live updates. Download the TOI app.