The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has deleted an addition of ₹3.54 crore made by the Income Tax Department towards alleged winnings from online rummy games.
The bench of Vijay Pal Rao (Vice President) and Manjunatha.G (Accountant Member) observed that the Assessing Officer (AO) incorrectly treated the taxpayer’s gross gaming receipts as taxable winnings despite the records clearly showing that the player had actually incurred a net loss of ₹30.43 lakh during the relevant assessment year.
The appeal arose from the assessment for Assessment Year 2022-23, where the taxpayer had filed a return declaring income from salary and other sources. During scrutiny proceedings, the AO relied on information obtained during a search conducted in the case of Gameskraft Technology Pvt. Ltd. The data indicated gross gaming winnings of ₹3,54,44,447, which the AO concluded had escaped taxation. Accordingly, the amount was brought to tax under Section 115BB of the Income Tax Act, which governs taxation of winnings from games.
The taxpayer disputed the assessment and argued that the figures relied upon by the Department were incomplete and misleading. According to the transaction details maintained by the gaming platform itself, the taxpayer had made total buy-ins of approximately ₹3.84 crore while receiving gross winnings of ₹3.54 crore, resulting in an overall loss of ₹30,43,537 rather than any taxable gain. The taxpayer contended that the AO had merely picked up the gross winnings figure without considering the corresponding buy-ins, thereby arriving at an erroneous conclusion.
The department defended the assessment by arguing that, under the law applicable for AY 2022-23, gross winnings from games were taxable under Section 115BB without allowing any deduction for expenditure. The Department also relied upon Section 58(4) of the Income Tax Act, which prohibits deduction of expenditure incurred in earning income from winnings, to justify the addition.
After examining the records submitted by the gaming company, the ITAT observed that the transaction statement itself contained two separate sets of information—one reflecting the calculation of winnings or losses after considering buy-ins, and another reflecting ledger entries of payments and withdrawals. Both sets of records consistently showed that the taxpayer had incurred a net loss of ₹30.43 lakh during the year.
The Tribunal held that the Assessing Officer committed a serious error by relying solely on the gross winnings figure while completely ignoring the buy-in amount invested by the taxpayer. According to the Tribunal, the difference between the amount invested and the amount received determines whether there is an actual gain or loss from gaming transactions. Since the records unmistakably established a net loss, no taxable winnings arose in the hands of the taxpayer.
The Bench further noted that if the taxpayer had actually earned taxable winnings, the gaming platform would ordinarily have deducted tax at source under Section 194B of the Income Tax Act. However, no such TDS had been deducted on the alleged winnings, which further supported the taxpayer’s contention that no taxable winnings had arisen during the relevant year.
The Tribunal also observed that if the Assessing Officer had any doubt regarding the actual winnings, he ought to have sought clarification from the gaming company instead of mechanically treating the gross receipts as taxable income.
Holding that the assessment was based on an incorrect appreciation of the transaction data, the Hyderabad Bench set aside the orders of both the Assessing Officer and the Commissioner (Appeals) and directed the Department to delete the addition of ₹3,54,44,447 made under Section 115BB.
The Tribunal also considered a separate addition of ₹5.71 lakh, which had been made after the Assessing Officer disallowed deductions claimed under Chapter VI-A and deduction relating to house property due to lack of supporting documents during assessment.
Before the Tribunal, the taxpayer produced evidence showing that an updated statement of total income had been prepared and tax had already been paid under the relevant provisions of the Act. Since these documents had not been examined by the lower authorities, the Tribunal restored the matter to the Assessing Officer for verification. It directed that if the tax had indeed been paid as claimed, the corresponding addition should also be deleted.
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