Net Loss from Online Gaming After Accounting for Buy-In Amounts Is Not Taxable Under Section 115BB

ORDER

Waseem Ahmed, Accountant Member.- The present appeal filed at the instance of the assessee pertaining to Assessment Year 2022-23 is directed against order of the learned Commissioner of Income Tax Appeal at National Faceless Appeal Centre (hereafter- learned CIT(A)) under the provisions of section 250 of the Income Tax Act 1961 (hereafter-the Act).

2. The interconnected issue raised by the assessee is that the learned CIT(A) erred in confirming the addition of Rs. 2,33,52,271/- made by the AO on the basis of wrong appreciation of facts.

3. The facts in brief are that the assessee, an individual, filed return of income for Rs. A.Y. 2022-23 declaring total income of Rs. 4,32,800/-which included income from house property, business income and income from other sources.

4. Subsequently, the case was selected for scrutiny assessment for verification of information received from CRIU through the Insight Portal that the assessee had earned winnings of Rs. 2,33,52,271/- from M/s Gameskraft Technologies Pvt. Ltd. during F.Y. 2021-22, which had not been disclosed in the return of income. The information available on the Insight Portal showed that the assessee had participated in online gaming activities conducted through the portals “Rummyculture” and “Gamezy” operated by M/s Gameskraft Technologies Pvt. Ltd.

4.1 The AO further observed that search and seizure action u/s 132 of the Act was conducted in the case of M/s Gameskraft Technologies Pvt. Ltd. on 15.03.2022. During the course of search and post-search proceedings, information was gathered regarding winnings earned by players using the online gaming portals operated by the said company. The dissemination note reproduced in the assessment order explained that Gameskraft Technologies Pvt. Ltd. operated gaming portals namely “Rummyculture” and “Gamezy” wherein games such as deal, pool, points, tournaments, fantasy games, rummy and poker were played involving real money transactions.

4.2 The AO observed that real money as well as bonus amounts were used in the gaming activities and winnings credited to the player’s wallet after deduction of commission by the company constituted the gross winnings of the player. The AO referred to an illustration reproduced in the dissemination note to explain that where two players contribute Rs.100 each and the company deducts 10% commission, the balance amount of Rs. 180 credited to the winner’s account which would constitute gross winnings of the player. According to the AO, the entire amount credited to the winning player represented taxable gaming winnings.

4.3 The AO thereafter referred to the provisions of section 2(24)(ix), section 56(2)(ib), section 115BB and section 58(4) of the Act. The AO observed that winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever are specifically included within the definition of “income” under section 2(24)(ix) of the Act. The AO further observed that Explanation (ii) to section 2(24)(ix) defines the expression “card game and other game of any sort” to include any game show or entertainment programme played through electronic mode and therefore online gaming winnings also fall within the ambit of taxable income.

4.4 The AO further held that by virtue of section 56(2)(ib) of the Act, such gaming winnings are chargeable under the head “Income from Other Sources”. The AO also referred to section 115BB of the Act and observed that winnings from lotteries, crossword puzzles, races, card games and other games of any sort are taxable at a flat rate irrespective of normal slab rates. The AO specifically observed that the provisions of section 58(4) of the Act prohibit allowance of any expenditure, deduction or set off of losses while computing income from such winnings. The AO also relied upon the Finance Act, 1986 commentary and observed that no allowance or deduction is admissible against gross winnings from games. The AO further observed that notice u/s 133(6) of the Act was issued to M/s Gameskraft Technologies Pvt. Ltd. seeking confirmation regarding the winnings earned by the assessee. In response thereto, the company furnished details confirming that the assessee had earned gross winnings amounting to Rs.2,33,52,271/-. The AO therefore concluded that the assessee had earned gross winnings of Rs. 2,33,52,271/- during the relevant financial year and the same had not been offered to tax in the return of income filed by him.

4.5 The AO further observed that notices u/s 142(1) of the Act were issued calling upon the assessee to explain the gaming transactions and furnish supporting details. However, according to the AO, despite sufficient opportunities, the assessee failed to furnish proper explanation or supporting evidence. The AO noted that the assessee merely furnished bank statements and stated that the increase in receipts was due to online games and that return was filed u/s 44AD of the Act. The AO observed that the assessee failed to rebut the information available with the department and by remaining non-compliant did not deny the veracity of the information received from the investigation wing. Accordingly, the AO held that the amount of Rs. 2,33,52,271/- represented income by way of winnings from online games and liable to be assessed under the head “Income from Other Sources”. The AO further held that no deduction, expenditure or set off of losses was allowable against such winnings and therefore the entire gross amount of Rs. 2,33,52,271/- was liable to be taxed u/s 115BB of the Act. The AO therefore added the said amount to the returned income of the assessee and determined the total income at Rs. 2,33,85,071/- only.

5. The aggrieved assessee preferred an appeal before the learned CIT(A).

6. The assessee before the learned CIT(A) submitted that the AO erred in making addition of Rs. 2,33,52,271/- by treating the entire gross winnings reflected in the records of M/s Gameskraft Technologies Pvt. Ltd. as taxable income. The assessee submitted that the said figure does not represent real income earned by him. It was only the gross amount credited in the gaming wallet during multiple rounds of play. The assessee argued that in online gaming, money is repeatedly deposited, used for buy-in, re-entered into games, refunded, withdrawn and again redeposited. Therefore, the gross wallet credits cannot be equated with income chargeable to tax.

6.1 The assessee submitted that during the year, he had maintained an account on the Rummyculture platform. The account reflected deposit of personal funds, game participation entries, promotional incentives, withdrawals and the net result of gaming activity. The assessee explained that Rummy is a game where players participate by contributing entry amounts or buy-in amounts. The gross winnings shown by the platform merely represent the cumulative amount won in individual games before considering the amounts spent for participating in the games and losses suffered in other games. Thus, the gross winnings are not the final income of the player.

6.2 The assessee further submitted that the reply furnished by M/s Gameskraft Technologies Pvt. Ltd. itself showed that the total buy-in amount of the assessee was Rs.2,61,51,624/-, whereas the gross winnings were Rs.2,33,52,271/-. Therefore, the net result was a loss of Rs. 27,99,353/-. It was contended that once the information received by the AO from Gameskraft itself showed that the assessee had suffered a net loss, there was no justification for taxing the gross winnings as income. The AO selectively considered only the gross winning figure and ignored the buy-in amount and the net loss disclosed in the very same information.

6.3 The assessee submitted that the AO’s approach is contrary to the basic principle of taxation that only real income can be taxed. The Incometax Act taxes income and not gross movement of funds or turnover. The gross amount of Rs.2,33,52,271/- was only a movement of money within the gaming wallet and did not represent any real gain in the hands of the assessee. The assessee therefore argued that the addition was made on a hypothetical basis by treating recycled funds and repeated wallet entries as taxable income.

6.4 The assessee also contended that the AO misapplied section 58(4) of the Act. According to the assessee, section 58(4) restricts deduction of expenditure or allowance only after an amount is first established as “income”. It does not authorise the AO to treat gross turnover, gross wallet credits or gross gaming entries as income. The assessee argued that the AO first had to determine the real income or net winnings, if any, and only thereafter section 58(4) could be applied. Since the assessee had no net winnings and had in fact suffered a loss, there was no income on which section 58(4) could operate.

6.5 The assessee further submitted that the provisions relating to taxation of online games also support taxation only of net winnings. It was argued that section 194BA, introduced for online games, mandates deduction of tax at source only on net winnings from online games, either at the time of withdrawal or at the end of the financial year as per prescribed computation rules. The assessee contended that if he had really earned net winnings of Rs. 2,33,52,271/-, Gameskraft would have deducted TDS on such amount. The fact that no such TDS was deducted supports the assessee’s contention that there were no net winnings.

6.6 The assessee also relied upon the subsequent statutory framework introduced by the Finance Act, 2023 by way of section 115BBJ along with section 194BA of the Act. According to the assessee, these provisions clearly recognise that only net winnings from online games are taxable and not gross wallet movements. The assessee submitted that the formula for determining net winnings considers withdrawals, closing balance, opening balance and deposits, thereby recognising that player deposits and repeated fund circulation must be adjusted before determining taxable income. It was argued that the later amendment only clarifies the correct principle that only net winnings can be brought to tax.

6.7 The assessee further submitted that the CBDT’s own explanation on taxation of game winnings supports the same view. According to the assessee, the CBDT has recognised that what is taxable is the amount actually receivable by the player after reducing the stake placed. Therefore, the department itself has understood that taxability arises only on the final net outcome and not on the total volume of transactions undertaken during gameplay.

6.8 The assessee also argued that the AO relied upon the CRIU dissemination note and the reply received from Gameskraft u/s 133(6) of the Act without giving proper opportunity to the assessee to confront and verify the material used against him. The assessee submitted that the addition was made without furnishing meaningful opportunity to examine the information received from Gameskraft and without allowing the assessee to rebut the same effectively. It was therefore contended that the assessment suffered from violation of principles of natural justice.

6.9 The assessee further submitted that the AO wrongly treated online rummy winnings in the same manner as lottery winnings without appreciating the nature of online rummy. It was submitted that rummy involves knowledge, skill, memory, calculation, observation, strategy and decision-making. The assessee however submitted that even assuming that online gaming winnings are covered under section 2(24)(ix) and section 115BB of the Act, only the real net winnings, if any, could be considered for taxation. The gross figure cannot be taxed merely because it appears in platform records.

6.10 The assessee therefore submitted that the addition of Rs. 2,33,52,271/- made by the AO is unsustainable. The figure represents gross wallet credits or gross winnings before adjusting the buy-in amount of Rs. 2,61,51,624/-. Since the net result was a loss of Rs.27,99,353/-, there was no taxable income in the hands of the assessee from online gaming. Accordingly, the assessee prayed that the entire addition made by the AO be deleted and the appeal be allowed. However, the learned CIT(A) dismissed the assessee’s grounds of appeal and confirmed the finding of the AO by observing as under:

6.3 Ground Nos. 3.1, 3.2 and 3.3: The learned Assessing Officer has erred in treating the gross winnings of Rs. 2,33,52,271 from online games i.e. Rummy Culture as income of the appellant and adding the same as income of the appellant, the addition as made being wholly erroneous both on facts and law applicable is to be deleted. In any case, the additions having been made in the impugned assessment order are excessive and erroneous. In any case, there being no winnings from online games, the provisions of section 115BB are not applicable to the appellant.

6.3.1 These grounds are on the merits ofthe addition. The facts are that specific information was received through CRIU that the assessee had winnings of Rs. 2,33,52,271/- from online games played on the portal of M/s Gameskraft Technologies Pvt. Ltd. during the relevant previous year. To verify this, the Assessing Officer issued notice under section 133(6) to M/s Gameskraft Technologies Pvt. Ltd. and obtained a detailed player-wise statement. This statement confirmed that during the relevant financialyear, the assessee’s gross winnings from the platform were Rs. 2,33,52,271. The assessee has not denied that he was a player on this platform. The assessee has also not claimed that the statement furnished by the portal is fabricated or incorrect. Despite having opportunity, the assessee has not produced any contrary ledger from the portal or any certified record from M/s Gameskraft to dispute the figure of gross winnings. The only reply on record from the assessee is a brief letter referring to bank statements and to filing of return under section 44AD of the Act. That reply does not deal with the CRIU information, does not deal with the 133(6) confirmation and does not explain how the figure of Rs. 2,33,52,271 is wrong. In such a situation, the third-party confirmation obtained from the portal, which maintains the actual records ofall games and transactions, is the best and most reliable evidence on record.

6.3.2 On the legal side, section 2(24)(ix) clearly brings within the ambitofincome any winnings from lotteries, crossword puzzles, card games and other games of any sort or from gambling or betting of any form or nature whatsoever. Income from such winnings is chargeable to tax under the head “Income from other sources” by virtue of section 56(2) and section 115BB provides a special rate of tax on such winnings. Further, section 58(4) lays down that while computing income by way of such winnings, no deduction in respect of any expenditure or allowance in connection with such income shall be allowed under any provision of the Act. The legislative intent is thus clear that the gross winnings constitute the taxable base and no allowance can be claimed against such winnings. The assessee’s plea that there was no real income or that there were losses cannot be accepted in the absence of strong and specific evidence. There is nothing on record to show that the assessee has computed any net result of his gaming activity or that he has any certified net loss figure from the portal. In fact, the assessee has not even produced any computation legally prepared by himself. In these circumstances, the only ascertainable and legally relevant figure is the gross winnings certified by the portal. The Assessing Officer has rightly treated this figure as income ofthe assessee under section 2(24)(ix) of the Act.

6.3.3 The contention that the provisions of section 115BB do not apply is also without merit. Once it is established that the assessee has income by way of winnings from games as referred to in section 2(24)(ix), section 115BB squarely applies. The argument that there were no winnings is contrary to the material on record. The portal has affirmed that there were winnings of Rs. 2,33,52,271. The assessee has failed to rebut this with any cogent proof. The bald assertion made in appeal, unsupported by any ledger or evidence, cannot displace the verified information obtained from an independentthird party. The assessee had several opportunities to come forward withgameplay data, session-wise records, transaction logs or any other material to demonstrate that the figure ofwinnings is not correct or that it does not represent income. His complete failure to do so leads to an adverse inference that the departmental information is correct. I therefore hold that the Assessing Officer was justified, on facts and on law, in treating the gross winnings of Rs. 2,33,52,271 as income of the assessee and taxing the same under the special provisions applicable to such winnings. Grounds 3.1, 3.2 and 3.3 are therefore dismissed.

6.4 Ground No. 4: In any case, the learned Assessing Officer has erred in invoking the provisions of section 115BBE and taxing the additions made at special rate of 60% in the computation sheet annexed to the assessment order. The provisions of section 115BBE being not applicable, the invoking of such section and calculating tax at special rate is bad in law and is to be deleted.

6.4.1 This ground relates to the reference to section 115BBE in the computation sheet. I have examined the body ofthe assessment order and the computation. In the speaking part ofthe order, the Assessing Officer has clearly and correctly proceeded on the basis that the income in question is by way of winnings from games falling under section 2(24)(ix) of the Act. He has discussed the relevant provisions including section 2(24)(ix), section 56(2) and section 115BB and has concluded that the winnings are taxable under section 115BB at the prescribed rate. Nowhere in the reasoning portion is section 115BBE invoked or discussed. Section 115BBE deals with taxation of incomes referred to in sections 68 to 69D and is not relevant to winnings from games. It appears that in the preparation ofthe computation sheet, there has been a mechanical or typographical error in mentioning section 115BBE instead of section 115BB. However, such an error in the computation sheet does not go to the root of the matter when the main assessment order is clear and unambiguous in applying the correct charging provision. The appellate authority is expected to see the substance rather than the form. Here, the substance is that the Assessing Officer has taxed winnings from games under the correct head and with reference to the correct provision, namely section 115BB.

6.4.2 It is also important to note that the assessee has not shown that any prejudice has been caused in the sense of being subjected to a higher rate of tax which is not permissible in law. The correct legal position, as clarified above, is that section 115BB applies to such winnings and the applicable rate is that prescribed under that section. To the extent there is any discrepancy in the rate actually applied in the computation sheet, the same is only an arithmetical or clerical matter which can be corrected in the giving effect stage and does not require annulment or deletion of the addition itself. The existence of such a typographical mistake does not render the assessment invalid. I therefore hold that the reference to section 115BBE in the computation sheet is only a clerical error. The substantive addition on account of winnings remains valid and is to be taxed under section 115BB. This ground does not warrant any relief and is dismissed.

7. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

8. The learned AR before us filed paper book running from pages 1 to 149 and contended that the AO as well as the learned CIT(A) grossly erred in treating the cumulative gross winnings reflected in the gaming platform as taxable income of the assessee without appreciating the real nature of online gaming transactions. It was submitted that the figure of Rs. 2,33,52,271/- merely represented gross wallet credits generated during multiple rounds of gameplay and not the real income earned by the assessee. The learned AR submitted that the assessee had incurred buy-in/game participation amounts aggregating to Rs. 2,61,51,624/- and therefore the net result of the gaming activity was actually a loss of Rs. 27,99,353/- only. It was contended that the AO selectively relied only on the gross winnings figure while completely ignoring the corresponding buy-in amounts available in the very same data furnished by M/s Gameskraft Technologies Pvt. Ltd.

8.1 The learned AR further submitted that the Act taxes can be levied only on real income and not gross circulation or recycling of funds within the gaming wallet. It was argued that section 58(4) of the Act merely prohibits deduction of expenditure after determination of income and does not authorise taxation of gross wallet movements as income. The learned AR also placed heavy reliance on the newly inserted provisions of section 194BA, section 115BBJ and Rule 133 introduced by Finance Act, 2023 and submitted that the legislature itself has now recognised that only “net winnings” from online games are taxable. It was submitted that the later amendment is clarificatory in nature and therefore applicable even while interpreting section 115BB of the Act for A.Y. 2022-23.

8.2 The learned AR further relied upon CBDT Circular No. 05/2023 dated 22.05.2023 and submitted that the CBDT itself has prescribed a mechanism for determination of net winnings after considering deposits, withdrawals and balances in the gaming wallet. It was contended that if the intention of legislature was to tax gross wallet credits, there was no necessity to introduce a separate mechanism for computation of net winnings. The learned AR also relied upon the decisions of the Kolkata Bench of the Tribunal in the case of Royal Calcutta Turf Club v. Dy. CIT/ITO 76 ITD 237 (Calcutta) and the Delhi Bench in the case of Delhi Race Club (1940) Ltd. v. Dy. CIT [2007] 17 SOT 39 (Delhi) (URO) to contend that even under the earlier provisions relating to horse race winnings, only real net winnings after adjusting participation cost were considered for taxation and TDS purposes. Accordingly, it was prayed that since the assessee had not earned any net winnings during the year, the addition made by the AO deserved to be deleted.

9. The learned DR on the other hand strongly supported the orders of the AO and the learned CIT(A). It was submitted that the information received through CRIU and the reply furnished by M/s Gameskraft Technologies Pvt. Ltd. u/s 133(6) of the Act clearly established that the assessee had gross winnings of Rs.2,33,52,271/- from online gaming activities. The learned DR submitted that the assessee failed to produce any authenticated ledger, gameplay statement or certified computation from the gaming portal disproving the said figure. It wa further contended that section 2(24)(ix) read with section 115BB of the Act specifically taxes winnings from card games and other games of any sort and section 58(4) of the Act prohibits allowance of any deduction or loss against such winnings. The learned DR therefore submitted that the AO was justified in treating the gross winnings as taxable income and taxing the same under the special provisions applicable to gaming winnings.

10. We have heard the rival contentions of both the parties and perused the materials available on record. The short controversy arising for our consideration is whether the gross gaming winnings of Rs. 2,33,52,271 reflected in the gaming platform records can be treated as taxable income of the assessee u/s 115BB of the Act or whether only the real net winnings arising after adjusting the buy-in/deposit amounts can be brought to tax.

10.1 At the outset, we note that the entire addition made by the AO proceeds on the assumption that every amount credited in the gaming wallet during the course of gameplay constitutes taxable income in the hands of the assessee. The AO has proceeded to tax the cumulative gross winnings figure furnished by M/s Gameskraft Technologies Pvt. Ltd. without examining the corresponding buy-in amounts, repeated circulation of funds, redeployment of w innings in subsequent games and the ultimate net result of the gaming activity. From the materials placed on record, it is evident that the assessee had total buy-in amounts aggregating to Rs. 2,61,51,624/- as against gross winnings of Rs. 2,33,52,271/- resulting into a net loss of Rs. 27,99,353/-only. The revenue authorities have not disputed these figures emerging from the very same information obtained from Gameskraft u/s 133(6) of the Act. However, the authorities below selectively adopted only the gross winnings figure while completely ignoring the corresponding participation costs and buyin amounts embedded in the same transaction stream.

10.2 In our considered opinion, such an approach is contrary to the fundamental concept of “income” under the Act. The Income Tax Act taxes real income and not mere gross transactional movements or recycling of funds within a gaming wallet. Merely because amounts are repeatedly credited and debited during multiple rounds of online gameplay, the same cannot automatically assume the character of taxable income. Unless there is a real gain or accretion to the assessee, no income can be said to arise.

10.3 We further note that the provisions of section 115BB as applicable for the year under consideration used the expression “income by way of winnings”. Similarly, section 194B also contemplated deduction of tax from “income by way of winnings”. Thus, even under the pre-amended scheme, the legislature always intended to tax only the real winnings component and not the gross turnover or gross circulation of money during gameplay. We further note new section being section 115BBJ and section 194BA was inserted vide Finance Act 2023 with respect to wining from online game. These provision uses the phrase “net wining” rather income by way of “wining”. At this junction it is relevant to reproduce the memorandum explaining the provisions of Finance Act, 2023 introducing section 194BA and section 115BBJ which reads as under:

TDS and taxability on net winnings from online games

Section 194B of the Act provides that the person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding ten thousand rupees shall, at the time of payment thereof, deduct income-tax thereon at the rates in force.

2. Section 194BB of the Act provides for similar provisions for deduction of tax at source for horse racing in any race course or for arranging for wagering or betting in any race course.

3. Section 115BB of the Act provides for the rate of tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature.

4. It is seen that deductors are deducting tax under section 194B and 194BB of the Act by applying the threshold of Rs 10,000/- per transaction and avoiding tax deduction by splitting a winning into multiple transactions each below Rs 10,000/-. This is against the intention of legislature.

5. It is also seen that in recenttimes, there has been a rise in the users of online games. There is a need to bring in specific provisions regarding TDS and taxability of online games due to its different nature, being easily accessible vide the Internet and computer resources with a variety ofplaying options and payment options.

6. Accordingly, it is proposed to:—

10.4 A careful reading of the above memorandum clearly shows that the legislature itself noticed practical difficulties in taxing online gaming transactions under the old framework. The memorandum specifically recognised the distinct nature of online gaming and therefore introduced a special mechanism for taxation and TDS on “net winnings” from online games. The newly inserted provisions expressly provide that tax is to be deducted and levied only on “net winnings” computed in the prescribed manner.

10.5 Further, Rule 133 framed pursuant to section 194BA provides a complete computational mechanism for determination of net winnings by considering opening balance, deposits, withdrawals and closing balance in the user account. The CBDT Circular No. 05/2023 dated 22.05.2023 also elaborately explains the methodology for determination of net winnings from online games.

10.6 The circular further clarifies that transfers within user accounts, deposits made by users and repeated circulation of amounts cannot themselves constitute taxable winnings unless there is net accretion in the user account. The mechanism prescribed in Rule 133 proceeds entirely on the principle that only net winnings are taxable and not gross wallet credits.

10.7 In our considered opinion, the subsequent insertion of section 194BA and section 115BBJ does not introduce any fundamentally new principle of taxation. Rather, the amendment merely clarifies and codifies the already existing legislative intent that only real net winnings from online games are chargeable to tax. The amendment was necessitated because the earlier provisions contained no specific computational mechanism for online gaming activities involving continuous deposits, withdrawals, buy-ins, bonus credits and repeated circulation of funds within electronic gaming wallets.

10.8 It is a settled principle of law that a subsequent amendment introduced to remove ambiguity and explain the true legislative intent is clarificatory in nature. In the present case, the newly inserted framework only explains how winnings from online games are to be computed and taxed. Therefore, in our considered view, the principles embedded in section 115BBJ, section 194BA and Rule 133 are clarificatory and declaratory in nature and therefore throw considerable light on the correct interpretation of section 115BB even for the year under consideration i.e. A.Y. 2022-23.

10.9 We further notice that similar principles have already been recognised by the coordinate benches of the Tribunal in the context of horse race winnings while interpreting section 194BB and the expression “winnings”. In the case of Royal Calcutta Turf Club (supra), the Kolkata Bench of the Tribunal held that only net winnings after adjusting the investments made by the punter can be considered for the purposes of deduction of tax at source. The Tribunal specifically recognised that “winnings” in common parlance means the amount received in excess of the amount invested by the punter. The relevant observations of the Kolkata Bench are reproduced as under:

11. The matter requires examination from legal angle also. For this purpose, we shall extract the provisions of section 194BB as below :

“194BB. Any person, being a bookmaker or a person to whom a licence has been granted by the Government under any law for the time being in force for horse racing in any race course or for arranging for wagering or betting in any race course, who is responsible for paying to any person any income by way of winnings from any horse race in an amount exceeding five thousand rupees shall, at the time ofpayment thereof, deduct income-tax thereon at the rates in force :”

It is firstly required to be noted in this connection that the expression used in this section is “income by way of winnings”. The connotation of “income” necessarily implies the net income after deducting the expense incurred for earning the gross income. There cannot to any doubt about the fact that the cost of purchasing tickets for race which fetches the prize money, must necessarily be deducted to arrive at the net income. Further- more, the legislation has also used the expression “from any horse race” and not “horse races” in plural. It thus means that the income by way of winnings from any particular horse race is required to be taken into consideration. So, one horse race is required to be taken as a unit and the entire money received by way of winnings from the said horse race is first to be considered as the gross income from that horse race, therefrom is required to be deducted the investment made by the punter towards acquiring the tickets, may be more than one, but pertaining to the same horse race. In principle, we, therefore, do not find any hesitation in directing that tax is required to be deducted only from the net income arising out ofthe horse race to the punter from any particular race after deducting the investments made by the punter in purchasing all the tickets relating to such horse race. The CBDT also accepted the said proposition mostly in its Circular No. 240 as mentioned above. The CBDT, however, directed that investment in such tickets alone which fetched the winnings money should be deducted, we are, however, of the opinion that if all the tickets purchased by a punter in a particular horse race can be linked up together and ifthere be regular machinery with the Turf Club authorities to take into consideration all the tickets purchased in connection with one horse race, then the entire amount of investment on all the horses irrespective ofwhether the horse won or lost in that race, should be treated as investment made by the punter in that horse race. However, a note of caution is being recorded in this connection. A claim made by the punter that he had purchased a large number of tickets separately in respect ofthe same horse race should not be accepted unless such claim can be verified by a process existing in the procedural mechanism of the Turf Club.

10.10 Similarly, the Delhi Bench of the Tribunal in the case of Delhi Race Club (1940) Ltd. (supra) also followed the above principle and held that the amount invested by the punter in horse races is required to be reduced while computing winnings for TDS purposes u/s 194BB of the Act. The relevant observations of the Delhi Bench are reproduced as under:

11. With regard to the second contention of the learned Authorised Representative regarding deduction of investment made by punters in the horse races, we found that issue stands squarely covered by the decision of Tribunal Calcutta Bench in the case of Royal Calcutta Turf Club (supra), as follows :

“The expression used in section 194BB is income by way of winnings. The connotation of income necessarily implies the net income after deducting the expenses incurred for earning the gross income. There could not be any doubt about the fact thatthe cost ofpurchasing tickets for race which fetched the prize money, must necessarily be deducted to arrive at the net income. Furthermore, the legislation has also used the expression ‘from any horse race’ and not ‘horse races’ in plural. It, thus, meant that the income by way of winnings, from any particular horse race is required to be taken, into consideration. So, one horse race is required to be taken as a unit and the entire money received by way of winnings from the said horse race is first to be considered as the gross income from that horse race. Therefrom one is required to deduct the investment made by the punter towards acquiring the tickets, may be more than one, but pertaining to the same horse race. Therefore, tax is required to be deducted only from the net income arising out of the horse race to the punter; from any particular race after deducting the investment made by the punter in purchasing all the tickets relating to such horse race. The CBDT has also accepted the said proposition in its Circular No. 240, but has directed that investment in such tickets alone which fetched the winnings money should be deducted. However, if all the tickets purchased by a punter in a particular horse race club be linked up together and if there be regular machinery with the turf club authorities to take into consideration all the tickets purchased in connection with one horse race, then the entire amount of investment on all the.horses.irrespective of whether the horse won or lost in that race, should be treated as investment made by the punter in that horse race. A claim made by the punter: that he has purchased a large number of tickets separately in respect of the same horse race, should not be accepted unless such claim could be verified by a process existing in the procedural mechanism of the turf club.”

12. No decision to the contrary was brought to our notice by learned Departmental Representative during the course of hearing. We are well aware of the judicial precedent that an order passed by the co-ordinate Bench should not be lightly disregarded. In taking this view, we are supported by the decision of Hon’ble Supreme Court in the case of Union of India v. Paras Laminates (P.) Ltd. [1990] 186 ITR 722 wherein Hon’ble Supreme Court has observed that it is true that a Bench of two Members must not lightly disregard the decision of another Bench of the same Tribunal on an identical question. The rationale of this rule is the. need of continuity, certainty and predictability in the administration ofjustice. As the facts and circumstances of the instant case are in pari materia, respectfully following the proposition laid down by the coordinate Bench, the Assessing Officer is directed to reduce the amount oftickets purchased by the punter relating to such horse race.

10.11 Although the above decisions were rendered in the context of horse race winnings, the underlying principle equally applies to online gaming transactions. The common thread running through section 194BB, section 194B, section 194BA, section 115BB and section 115BBJ is that only the real winnings component is intended to be taxed and not the gross circulation of funds.

10.12 The authorities below, in our considered opinion, committed a fundamental error in treating the entire gross wallet credits as taxable income without determining whether the assessee had any real net winnings at all. Once the very information received from Gameskraft itself disclosed that the assessee’s buy-in amounts exceeded the gross winnings, the addition made by the AO becomes wholly unsustainable.

We also find considerable force in the assessee’s argument that had there been actual net winnings of Rs. 2,33,52,271/-, the online gaming intermediary itself would have deducted tax at source on such winnings. The absence of TDS itself probabilises the assessee’s contention that there were no net winnings chargeable to tax.

10.13 The reliance placed by the learned CIT(A) on section 58(4) is also misplaced. Section 58(4) merely prohibits deduction of expenditure or allowance while computing income from winnings. However, before invoking section 58(4) of the Act, the authorities must first determine whether there exists any real “income by way of winnings”. The provision does not authorise the department to artificially treat gross transactional entries or recycled gaming funds as income. Accordingly, considering the totality of facts and circumstances of the case, the legislative framework introduced by Finance Act 2023, Rule 133, CBDT Circular No. 05/2023 and the judicial principles laid down in Royal Calcutta Turf Club and Delhi Race Club, we hold that only real net winnings from online gaming activities can be subjected to tax and not the gross wallet credits or gross winnings reflected during intermediate stages of gameplay.

10.14 Since the material available on record itself demonstrates that the assessee had incurred net loss in the gaming activity after considering the buy-in amounts, there remained no taxable income liable to be assessed u/s 115BB of the Act. The addition of Rs .2,33,52,271/- made by the AO and sustained by the learned CIT(A) is therefore directed to be deleted. Accordingly, the grounds raised by the assessee are allowed.

11. In the result, the appeal raised by the assessee is allowed.