ITAT Hyderabad: Online Gaming Addition Struck Down Where Platform Records Confirmed Net Loss — Emdarapu Kumaraswamy Vs ITO

Background and Case Overview

The Income Tax Appellate Tribunal (ITAT), Hyderabad, recently delivered a significant ruling in Emdarapu Kumaraswamy Vs ITO, addressing a contentious question around the taxability of online gaming transactions under Section 115BB of the Income Tax Act, 1961. The appeal before the Tribunal arose from an order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, in connection with Assessment Year 2022-23.

At the heart of the dispute were two additions made by the Assessing Officer — first, an addition of Rs. 3,54,44,447 purportedly representing winnings from online rummy played on the M/s. Gameskraft Technology Pvt. Ltd. platform, and second, a disallowance of Rs. 5,71,288 pertaining to deductions claimed under Chapter VI-A of the Income Tax Act, 1961 and under Section 24(b) of the Act.

The Tribunal's ruling on the primary addition has drawn considerable attention, as it directly addresses the question of whether gross reported winnings can be subjected to tax under Section 115BB without accounting for the corresponding buy-in amount invested by the assessee.

Facts of the Case

The assessee, an individual, filed his return of income for Assessment Year 2022-23 declaring a total income of Rs. 15,62,200, consisting of salary income and income from other sources. The return was selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) mechanism.

During the course of assessment proceedings, the Assessing Officer came across information gathered during a search operation conducted under Section 132 of the Income Tax Act, 1961 in the case of M/s. Gameskraft Technology Pvt. Ltd. The data obtained during the search indicated that the assessee had earned gross winnings amounting to Rs. 3,54,44,447 through online gaming on the platform operated by the said company. Since this amount had not been offered to tax in the return filed by the assessee, the Assessing Officer issued a notice seeking an explanation.

In response, the assessee clarified that he had indeed played rummy on the online platform but had ultimately incurred a net loss of Rs. 32,40,810 during the relevant period. He further pointed out that even the data submitted by M/s. Gameskraft Technology Pvt. Ltd. itself reflected a net loss of Rs. 30,43,537 when the total BuyIn amount was set off against the gross winnings reported. The assessee therefore contended that the addition proposed by the Assessing Officer was factually incorrect.

Assessment Order: AO's Stand

Notwithstanding the assessee's explanation, the Assessing Officer proceeded to make the addition. He relied exclusively on the gross winnings figure of Rs. 3,54,44,447 reported by the gaming company and held that under the provisions of Section 115BB of the Income Tax Act, 1961, gross winnings from any game — including online games — are fully taxable, with no allowance for deduction of any expenditure whatsoever.

The Assessing Officer also invoked Section 58(4) of the Act, which explicitly prohibits any deduction of expenditure from income arising out of games, including horse races. On this basis, the entire gross winnings amount was brought to tax under Section 115BB.