Tax notice on Rs 28L online gaming loss; he wins case

By Sohail Khan 4 September 2026, 10:45 am

Synopsis

Gamer invested Rs 2.61 crore to play online Rummy, poker games; loses net Rs 28 lakh, stops playing, files ITR reporting Rs 4 lakh income; gets tax notice; he wins case in ITAT Bangalore. Waseem Ahmed, the Accountant Member, and Soundararajan K., the Judicial Member of ITAT Bangalore heard this case.

ITAT Bangalore hasrecently ruled that gross winnings from online real money gaming activities shouldn’t be taxed, only net profits. This judgement came about in a case involving Mr Channappa from Doddakallasandra, Bengaluru, who had invested more than Rs 2 crore to play online Rummy and poker but ended up losing a net of Rs 28 lakh.

Channappa had filed an income tax return (ITR) reporting Rs 4.32 lakh total income which included sources like rental income from house, business income and income from other sources. Subsequently, his case was selected for scrutiny by the Income Tax Assessing Officer, Bangalore for verification of information. The tax officer had received information that Channappa had participated in online gaming activities in “Rummyculture” and “Gamezy” portals operated by Gameskraft Technologies Pvt. Ltd where he reportedly won Rs 2.33 crore, a figure he had not been disclosed in his ITR.

Separately, on March 15, 2022, the Income Tax Department conducted a search and seizure operation in the offices of Gameskraft and gathered information regarding winnings earned by players using the online gaming portals operated by them.

Gameskraft Technologies Pvt. Ltd. operated gaming portals named Rummyculture and Gamezy wherein games like deal, pool, points, tournaments, fantasy games, rummy and poker were played involving real money transactions.

The Income Tax Assessing Officer (AO) observed that real money as well as bonus amounts were used in gaming and the winnings credited to the players’ wallets after deduction of commission by the company constituted the gross winnings of the player.

The tax officer used an example to explain that when two players contribute Rs 100 each and the company deducts 10% commission, the balance Rs 180 gets credited to the winner’s account and counts as the gross winnings of the player. So the AO made the point that the entire amount credited to the winning player is considered taxable gaming winnings.

The AO thus held such online real money game winnings will be taxed as income from other sources under Section 56(2)(ib).

Additionally, the AO also pointed out that under Section 115BB, winnings from lotteries, crossword puzzles, races, card and any other game are taxed at a flat rate irrespective of normal slab rates.

Moreover, despite receiving tax notices, Channappa had failed to provide a proper explanation or supporting evidence. Accordingly, the AO held that the entire Rs 2.33 crore represented income by way of winnings from online games and liable to be assessed under the head “Income from Other Sources”.

After this, Channappa took things seriously and appealed to the Commissioner of Appeals (CIT A), where he argued that Gameskraft’s response indicated that the total buy-in amount was Rs 2.61 crore, whereas the gross winnings were 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.”

However, CIT (A) dismissed Channappa’s appeal and confirmed the AO’s action. Feeling aggrieved, Channappa filed an appeal in ITAT Bangalore. On July 23, 2026 he won the case in ITAT Bangalore. Chartered Accountant Nagin KIncha and Advocate Smt Suman Lunkar represented him before ITAT Bangalore.

Why did Channappa win the case in ITAT Bangalore?

Chartered Accountant Suresh Surana says that Channappa won the case in Income Tax Appellate Tribunal (ITAT) Bangalore because the information obtained from the gaming company Gameskraft demonstrated that Channappa’s buy-in amounts was Rs 2.61 crore while his gross winnings were Rs 2.33 crore, meaning there was a net loss of Rs 27.99 lakh (Rs 28 lakh).

According to Surana, the Income Tax Department had selectively relied on the gross winnings figure while ignoring the corresponding buy-ins forming part of the same transaction data.

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.”

Accordingly, the ITAT Bangalore ruled that in this case only real net winnings from online gaming activities could be subjected to tax and not gross wallet credits or amounts reflected as winnings at intermediate stages of 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 the his appeal.”

According to Surana, the ITAT Bangalore held that the lower authority’s approach was contrary to the fundamental concept of “income” under the Income-tax Act.

The Income Tax Act taxes real income and not merely the gross movement, circulation or recycling of funds.

Surana says: “Repeated credits and debits in an online gaming wallet do not automatically become taxable income unless they result in a real gain or accretion in the hands of the taxpayer.”

According to Surana, ITAT Bangalore also observed that even the provisions applicable before the Finance Act, 2023, i.e. Sections 115BB and 194B, used the expression “income by way of winnings”.

Surana says: “This indicated that the legislative intention was to tax the real winnings component and not the gross turnover or cumulative movement of money during gameplay.”

ITAT Bangalore also examined the subsequent framework introduced by the Finance Act, 2023, through Sections 115BBJ and 194BA, read 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.”

Thus ITAT Bangalore held that these provisions did not introduce a fundamentally new principle. Instead, they clarified and codified the existing intention that only real net winnings from online games should be taxed.

Surana says: “Accordingly, the principles underlying the subsequent provisions could be used to interpret section 115BB for Assessment Year 2022-23.”

According to Surana, ITAT Bangalore also placed reliance on CBDT Circular No. 5/2023 dated May 22, 2023, which explains the mechanism for determining net winnings from online games.

ITAT Bangalore further referred to the decisions in the Royal Calcutta Turf Club and Delhi Race Club case, wherein it was held, in the context of horse-race winnings, that the amount invested by a participant must be considered while determining the real winnings.

ITAT Bangalore also rejected the Income Tax Department’s reliance on Section 58(4) and clarified that Section 58(4) merely prohibits the deduction of expenditure or allowances while computing income from winnings.

However, before applying that restriction, the Income Tax Department must first establish that the taxpayer has earned real “income by way of winnings”.

Surana says: “This provision cannot be used to artificially treat gross wallet credits or recycled funds as taxable income.”