Taxation on Winnings from Online games! Might have to pay higher tax

Table of Contents

1. Overview
2. Introduction
3. Tax on winnings from online games [Section 115BBJ]

Check out Taxmann's Master Guide to Income Tax Act which covers section-wise commentary on the Finance Act 2023 along with Income Tax Practice Manual. It also covers a section-wise digest of landmark rulings from 1922 – 2023 (Feb.) and the gist of Circulars & Notifications from 1961 – 2023 (Feb.).

1. Overview

The Finance Act, 2023 introduces a new scheme for the taxation of winnings from online games at a flat tax rate of 30% with effect from the assessment year 2024-25. All winnings from online games on or after 1-4-2023 shall be covered under this scheme.

Under this scheme for the taxation of winning from online games, the following provisions have been introduced or amended:

(a) A new Section 115BBJ has been inserted in the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) to provide a regime for taxation of winning from online games. The section is applicable from Assessment Year 2024-25;

(b) A new Section 194BA has been inserted in the Act to require the deduction of tax from the winning from online games. The section is applicable from 01-04-2023;

(c) A consequential amendment has been made to Section 115BB of the Act to exclude winning from online games from its scope. The amendment is applicable from Assessment Year 2024-25;

(d) A consequential amendment has been made to Section 194B of the Act to exclude from its scope the winning from online games. The amendment is applicable from 01-04-2023; and

(e) Section 194B and Section 194BB of the Act have been amended to fix the threshold limit of Rs. 10,000 for a financial year for a single payment or in the aggregate. The amendment is applicable from 01-04-2023.

2. Introduction

Online gaming is considered a disruptive industry considering its size and scale. The Indian gaming industry has grown at a CAGR of 18.6% from 2016 to 2020, and it is estimated that it will grow to reach US$2 billion by 2023¹. Online real money game players are expected to grow from 80 million in 2020 to 150 million by 2023. The country has over 400 gaming start-ups in India². Considering the size and potential of the industry, a new tax framework has been introduced that aims to provide certainty on the taxability of the winnings from any online game, and deducting tax on every winning at the source itself.

2.1 Types of Online Games

An online game can be divided into two categories based on its format, namely:

2.1.1 Monetary and non-monetary games

This category of online games can be one of the following:

(a) The gaming platform allows users to place monetary bets to win the pool amounts based on the outcome of the game (“Winning in real money”);

(b) The platform charges for facilitating the games, and the users do not win any real money (“Recreational games without any prize money”); and

(c) The gaming platform is free, but additional activities, such as retaining the player’s life, extending game progress, and boosting performance, are chargeable, but the users do not win any real money (“freemium Model”).

2.1.2 Format-based games

This category of online games can be one of the following:

(a) Users create virtual teams based on real players’ proxies of a given sport (such as cricket or soccer), and the outcome is decided based on the players’ real statistical performance. The users win real money in this game format (“Fantasy Sports”);

(b) Skill-based games, such as chess, ludo or shooting. The users may or may not win real money in this game format (“Casual Games”);

(c) Multi-player video games to provide a more engaging experience through tournaments and teaming. The users may or may not win real money in this game format (“E-sports”);

(d) Games designed for education, such as quizzes and puzzles. The users may or may not win real money in this game format (“Educational Based Gaming”); and

(e) Games in which players wager over which player has the best set of cards according to the specific game’s rules. The users win real money in this game format (“Card-based games”).

2.2 Operating model of online games

The operating model workflow of online games consists of three models: Platform fee-based games (with prize winnings), Pay to play model (without prize winnings), and freemium Model.

Online games, in which prize money is distributed to the players, generally operate in the “winning prize pool” format. In this format, the gaming platform receives deposits from the players through authorised payment gateways. The platforms have no right to such deposits until the user uses the deposit to play a game. When a user pools the amount into game play, the platform deducts a portion of the stake as a rake fee for facilitating the game. The remaining stake (net of the rake fee) is considered the winning prize pool, and players compete against each other. The platform does not participate in the game but instead serves as a facilitator. The entire prize pool is distributed to the contest winner(s) as per the defined rules. Users are free to withdraw their winnings to their bank account or use them for further gameplay. The best example of such a format is online card-based games or fantasy sports.

2.3 History of taxation of winnings from games, etc.

Receipts of casual and non-recurring nature (except certain prescribed receipts) were specifically exempt under Section 10(3) of the Act till the assessment year 1972-73. The Finance Act, 1972 introduced the taxation of casual and non-recurring receipts in the nature of “any 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” (hereinafter referred to as “winnings”) in the definition of income by introducing sub-clause (ix) in Section 2(24). The said Finance Act prescribed the taxation of winnings as income from other sources under Section 56(2)(ib) and had also withdrawn the exemption under Section 10(3) on the casual and non-recurring receipts in the nature winnings. The machinery for collection and recovery of taxes was also provided under Section 194B, which mandates deduction at source at rates in force at the time of payment of winnings.

Section 115BB was inserted by the Finance Act, 1986 to tax the winnings at the flat rate of 40% [It is to be noted that the rate of 40% was reduced to 30% w.e.f. 1-4-2002 by the Finance Act, 2001]. Simultaneously, the said Finance Act, 1986 inserted a new sub-section (4) to Section 58 to provide that no deduction shall be allowed in respect of any expenditure or allowance in computing the income by way of winnings, which were provided to be charged at a specified flat rate under Section115BB.

The definition of the terms “lottery” and “card game and other game of any sort” was not explicitly provided when the provision to tax such winnings was introduced. The initial litigation in the context of lotteries primarily revolved around business promotion/sales promotion/incentives schemes floated by business houses wherein they were offering prizes in cash or in kind by way of lucky draws. The tax authorities argued that those schemes are in the nature of a lottery on the premise that the result is merely dependent upon chance and not upon any skill per se. The courts held that mere gratuitous distribution without any price being paid by participants for acquiring a chance and receiving a prize would not amount to a lottery³. As regards the expression’ other games of any sort’, the Supreme Court in CIT v. G.R. Karthikeyan [1993] 68 Taxman 145 (SC) held that it is of wide amplitude and its meaning shall not be confined to games of a gambling nature alone.

Later on, the amendments were made by the Finance Act, 2001, and the definitions of “lottery” and “card game and other game of any sort” were prescribed by introducing an Explanation in Section 2(24)(ix). These amendments effectively negated the opinion of the judiciary that a prize scheme is not a “lottery” and also clarified that quiz programmes, contests, etc., shall also qualify as taxable casual incomes under Section 2(24)(ix).

2.4 Position before Finance Act, 2023

Section 115BB provides for the charging of tax (and Section 194B provides for deduction of tax) at 30% on any income by way of winnings from any of the following five categories (hereinafter referred to as ‘the specified categories’):

(a) Lottery;

(b) Crossword puzzle;

(c) Race, including horse race (not being income from the activity of owning and maintaining race horses);

(d) Card game and other game of any sort; or

(e) Gambling or betting of any form or nature.

Section 194B provides for deduction of tax at source if winnings are from categorie (a), (b) or (d) specified above. Similarly, section 194BB provides for deduction of tax at source if winnings are from horse races as specified in (c) above. There was no provision for TDS in case winnings were from category (e) before the Finance Act, 2023.

The courts have tested other casual incomes to determine if they should be taxable under this provision. Some judicial precedents are summarised below:

(a) The term “any other similar game” found in Explanation (ii) to Section 2(24)(ix) has to be held as an inclusive definition. It has to be read ejusdem generis, and as such, the activity of owning and maintaining horses cannot by any stretch of imagination fall in the definition of “card game or other game of any sort” found in Section 194B. It is held that “stake money” or “prize money” paid by the club to horse owners would not attract the provisions of Section 194B [Bangalore Turf Club Ltd. v. UOI [2014] 52 taxmann.com 290/[2015] 228 taxmann 234 (Karnataka)];

(b) The assessee was a bookmaker who used to accept bets from the punters on the horse races. The profit and loss of the bookmaker on a particular horse will depend on the bets he has collected on different horses from punters. In a situation where a favourite horse on which the punters have placed bet wins, the bookmaker stands to make a substantial loss. To minimise the loss, the club rules permit the bookmaker to lay over bets with another bookmaker (“hedging”). The bookmaker is allowed to make hedge bets to the extent of the total amount of bets he collected. This makes it clear that hedge betting by one bookmaker with another is an integral part of the activity of a bookmaker. Therefore, the total amount received by the assessee from the bets laid over by him with another bookmaker should not be treated as the winning from the horse race, as was commonly perceived in the case of a punter. Normal receipt of a bookmaker from accepting the bets from others was not assessable as winning from horse races. Thus, the receipt from such hedge-betting was to be assessed in the same manner as in the case of other receipts from bets accepted by a bookmaker [Asstt. CIT v. Raghunath B. Taware [2008] 114 ITD 638 (Pune – Trib.)].

The other provisions dealing with winning from the five activities mentioned above are provided in Section 2(24)(ix) read with Section 56(2)(ib) and Section 58(4). Section 2(24) defines the meaning of the term “income”, and sub-clause (ix) covers the said winnings. Section 56(2)(ib) provides that the income referred to in Section 2(24)(ix) shall be taxable under the head “Income from other sources”. Section 58(4) prohibits deducting any expenditure or allowance in connection with such winnings.

All the provisions explained above are still in force even after the insertion of Section 115BBJ by the Finance Act, 2023. The impact of such insertion is that the winnings from any online game shall be taxable under Section 115BBJ, notwithstanding such games are in nature of a lottery, crossword puzzle, race, horse race, card game, other game of any sort, gambling or betting of any form or nature whatsoever (‘specified category’). However, taxability under Section 115BB shall arise only in respect of the winnings from specified categories which are not played online. In terms of the scope of the two provisions, Section 115BBJ has a wider scope that levies a tax on winning from every online game, whether it is a game of skill or chance, and Section 115BB has limited scope to tax winning arising from specified categories. Any winnings from an offline game shall be taxed under Section 115BB only if such a game falls within the five specified categories. However, the casual income should be taxed as per general provisions if it does not fall into the above-specified categories.

The classification of a casual income into the five specified categories is important due to the following reasons:

(a) Casual income from specified categories shall be taxable at the flat rate of 30% under Section 115BB;

(b) Section 58(4) prohibits deduction in respect of any expenditure or allowance from the casual income earned from the specified categories;

(c) In view of Section 58(4), any loss from the activity in specified categories cannot be set off against income from the same or any other source;

(d) Section 56(2)(ib) provides that the income from the specified categories shall be taxable under the head “Income from other sources”.

Where the casual income does not fall in the specified categories, the above rules may not apply, and it shall be governed by general provisions. It is essential to evaluate the meaning and scope of each activity covered in the specified categories.

2.4.1 Meaning of lottery

“Lottery” is defined in Explanation (i) to Section 2(24)(ix) to include winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called.

The statutory definition of ‘lottery’ in Explanation (i) to Section 2(24)(ix) is not exhaustive. It is an inclusive definition and is also extensive in scope. Therefore, one is relegated to judicial dictionaries and decisions for the ordinary meaning of the lottery.

“Lottery” has been defined by Black’s Law Dictionary as a “chance for a prize, a scheme for distribution of a prize by a lot or chance, the number and value of which is determined by the operator of the lottery”. In Webster’s New International Dictionary, the word ‘lottery’ has been defined to mean “a scheme by which one or more prizes are distributed by chance among persons, who have paid or promised a consideration for a chance to win them, usually as determined by the members on tickets as drawn from a lottery wheel”.

Two ingredients are required to bring a scheme into the field of lottery: first, the distribution of property by chance or lot among the participants, and second, participants have either paid or agreed to pay a valuable consideration for the privilege of participating in the scheme⁴. In Sampanna Kuries (P.) Ltd. v. Income-tax Officer [2004] 141 Taxman 615 (Kerala), it was held that the essential element that goes to constitute a lottery are : (1) a prize or some advantage in the nature of a prize, (2) distribution thereof by chance, and (3) consideration paid or promised for purchasing the chance. Thus, unless all three elements are satisfied, the prize scheme cannot be considered a lottery. A price is charged for participating in the draw. The chance of a person getting the prize cannot be treated as part of the bargain unless independent consideration is there with respect to the prize awarded. Mere gratuitous distribution without any price having been paid by the participants for acquiring the chance and receiving a price that is ultimately distributed would not amount to a lottery⁵.

However, for the purpose of taxation under the Act, Explanation (i) to Section 2(24)(ix) has expanded the scope of the “lottery” to include winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called.

2.4.2 Meaning of card game and other game of any sort

Explanation (ii) to Section 2(24)(ix) provides that “card game and other game of any sort” includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game.

The Karnataka High Court⁶ held that the words “or card game and other game of any sort” found in Section 194B is to be read ejusdem generis. The words or phraseology “other game of any sort” would take its colour from the context in which the same has been used, and the said phrase can only be akin to the games which are specifically mentioned in the said provision.

2.4.3 Meaning of gambling

The term gambling generally means the “wagering of money or something of value (referred to as “the stakes”) on an event with an uncertain outcome, with the primary intent of winning money or material goods. Most Indian statutes interpret gambling as the Act of wagering or betting for money or money’s worth. The Oxford Dictionary defines gambling as “playing a game of chance for money or risky action undertaken with the hope of success”. The Black Law’s dictionary defines gambling as “the act of risking something of value for a chance to win a prize”. Further, to constitute “gambling,” the winner must either pay consideration for his chance to win or, without paying anything in advance, stand a chance to lose or win⁷. As per the States gambling legislation, gambling does not include wagering or betting upon a horserace, games of mere skill, and lotteries (covered under Lottery Laws). The Supreme Court⁸ defined gambling as “gambling, in a nutshell, is a payment of a price for a chance to win a prize. Games may be of chance, or of skill or of skill and chance combined. A game of chance is determined entirely or in part by lot or mere luck. A game of skill, on the other hand – although the element of chance necessarily cannot be entirely eliminated – is one in which success depends principally upon the superior knowledge, training, attention, experience and adroitness of the player”.

2.4.4 Meaning of betting

The Oxford Dictionary defines betting as an “action of gambling money on the outcome of a race, game, or other unpredictable events”. Betting can be defined as putting at stake a wagering amount (valuable or liquid cash) to predict the occurrence or non-occurrence of an event. It is always done against a second party who places his stake against the one placed by the first party. Neither of the parties that have put at stake their wagering amounts should have any control over the event on which the amount is wagered⁹.

2.5 Game of Skill v. Game of Chance

All the games specified in the five categories explained above can be classified either as a game of skill or a game of chance. Such classification is important to test the nature of any game or activity to determine if winnings from such games or activities could be held as income specified under Section 2(24)(ix). For example, if a game is not considered gambling (or any other specified category), the winnings from such game should not be taxed under Section 115BB. In that situation, the implications under Section 56(2)(ib) and Section 58(4) will also not apply.

The courts have predominantly used the test of ‘game of skill v. game of chance’ to determine if a game is in the nature of gambling or betting, etc. If it is shown that the game is primarily a game of skill, the Courts have held that winning cannot be said to be from gambling, thus, excluded from the scope of Section 2(24)(ix)¹⁰.

The primary test is to determine what dominates or preponderates, whether skill or chance. Games of chance fall under the category of gambling, while games of skill fall outside the ambit of gambling. The competitions which substantially involve skills are not gambling activities but are commercial activities protected under Article 19(1)(g) of the Constitution¹¹.

Determining whether a game is a “game of skill” or a “game of chance” depends on various factors. In a game of skill, the outcome is mainly determined by the player’s ability to apply his mental capabilities. The player has significant control and knows how the game should proceed. To excel in a “game of skill,” a player needs knowledge, training, strategy, and experience. An experienced player can have far better results and winnings than a beginner under the same conditions.

In a “game of chance”, an outcome is mainly determined by a random event like throwing dice, turning the wheel, and drawing and stacking cards. The player has little to no control over the proceedings of the game. No human mind knows or can know what will be until the dice are thrown, the wheel stops its revolution, or the dealer has dealt with the cards. The player’s mental abilities do not affect the game’s result. It could be said that if a player wins in a ‘game of chance’, it is purely because of his ‘luck’.

All games, naturally, consist of elements of both, i.e., elements of chance and skill. To determine whether any game is a ‘game of chance’ or a ‘game of skill’, we need to evaluate the nature of a particular game. The Madras High Court¹² stated that whether the game is a game of skill or chance is a question of fact and has to be decided by the facts and circumstances of each case. The Apex Court¹³ has held the expression “game of mere skill” means “mainly and preponderantly a game of skill”. The Courts have held that the game of rummy¹⁴, online fantasy sports¹⁵ and horse race betting¹⁶ are the “game of skill” and not the “game of chance”.

The Indian Courts have adopted the “Dominant Factor Test” or “Predominance Test” to determine the question of “game of skill”¹⁷. A game of chance and a game of skill is distinguished by the characteristics of the dominating element that ultimately determines the result of the game. The four qualifications defined by the Court are:

(a) Participants must have a distinct possibility of exercising skill and sufficient data upon which to calculate an informed judgment;

(b) Participants must have the opportunity to exercise the skill, and the general class of participants must possess the skill.

(c) Skill or efforts must sufficiently govern the results.

(d) The standard of skill must be known to the participants, and this standard must govern the results.

3. Tax on winnings from online games [Section 115BBJ]

With effect from the assessment year 2024-25, a new Section 115BBJ has been introduced by the Finance Act, 2023 to tax winnings from any online games. This provision provides as follows:

“Tax on winnings from online games

Notwithstanding anything contained in any other provisions of this Act, where the total income of an assessee includes any income by way of winnings from any online game, the income-tax payable shall be the aggregate of—

(i) the amount of income-tax calculated on net winnings from such online games during the previous year, computed in the manner as may be prescribed, at the rate of thirty per cent.; and

(ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the net winnings referred to in clause (i).

Explanation.—For the purposes of this section,––

(i) “computer resource” shall have the same meaning as assigned to it in clause (e) of the Explanation to section 144B;

(ii) “internet” means the combination of computer facilities and electromagnetic transmission media, and related equipment and software, comprising the interconnected worldwide network of computer networks that transmits information based on a protocol for controlling such transmission;

(iii) “online game” means a game that is offered on the internet and is accessible by a user through a computer resource including any telecommunication device.”

On para-phrasing, the provision provides as under:

(a) The provision starts with a non obstante clause overriding all other provisions of the Act;

(b) The total income of an assessee includes the specified income;

(c) The specified income should be winnings from any online games;

(d) Online games should be offered on the internet;

(e) These games should be accessible by a user through a computer resource, including any telecommunication device;

(f) The winning from online games shall be chargeable to tax;

(g) The net winning shall be computed in the prescribed manner;

(h) The net winning from online games shall be taxable at the special flat rate of 30%;

(i) The remaining income shall be taxable as per the other specified provisions of the Act.

3.1 Overriding effect of the provision

Section 115BBJ begins with “Notwithstanding anything contained in any other provisions of this Act”. The impact of this non obstante clause is that in case of conflict with any other provision of the Act, this provision shall have an overriding effect. Thus, all winnings from any online game will be taxable at the rate specified under this provision, even if:

(a) The user plays online games professionally or casually;

(b) The winning is in the nature of betting, wagering, gambling income or otherwise.

This provision will also override the provisions of Section 115BB.

3.2 Winnings from online games

The income taxable under Section 115BBJ shall be the winnings from online games. It should be noted that every income from online games shall not be taxed under this provision, but only the winnings from online games. In other words, an income shall be covered within the scope of this provision if:

(a) It is in the nature of winnings; and

(b) It is earned from any online game.

3.2.1 Meaning of winnings

The term “winnings” is not defined by this provision. Thus, a general meaning of the term should be referred.

Macmillandictionary.com defines it as “something that someone does to win a race, competition, or prize”. Dictionary com defines it as “something that is won, especially money”.

The Universal Dictionary of the English language defines the word ‘winnings’ to mean “Amount won, especially money won in betting”. Thus, receipt from gambling or betting activities is also considered as winnings.

It can be said that in winning something, the following elements are generally found:

(a) Someone wins a contest;

(b) Something is won.

Winning a contest does not mean that the person who wins should also participate in the contest. If a user places a winning bet on one of the players participating in the E-sports tournament, the amount he wins can be termed “winning from online games”. Someone can win the content even if someone else on the other end has not lost it. Thus, winning is not determined by the defeat of the opposition. The contest’s outcome should result in something for the one who has won, which can be recognition, monetary gains or a prize in kind.

3.2.2 Meaning of game

The term “game” is not defined by this provision. Thus, a general meaning of the term should be referred.

Macmillandictionary.com defines it as

“a physical or mental competition conducted according to rules with the participants in direct opposition to each other or activity engaged in for diversion or amusement”.

Dictionary.com defines it as “an amusement or pastime”.

The word “game” is an indefinite word and has had various meanings¹⁸. A game is a trial of skill or chance between two or more contesting parties according to some rules by which one may succeed or fail¹⁹. The games may be of chance, skill or skill and chance combined. A game of chance is determined entirely or in part by lot or mere luck. In a game of chance, the result is wholly uncertain and doubtful. In a game of skill, success depends principally upon the player’s knowledge, training, attention, experience and adroitness; however, the element of chance necessarily cannot be entirely eliminated²⁰.

The Supreme Court²¹ has distinguished the words “game” and “puzzle”. The Court held that the outcome is fixed or pre-determined in a puzzle. A person solving a puzzle, unlike games, does not aim at winning by scoring more points but aims at arriving at the solution by finding the correct answer or by putting it together properly, and winning or losing can only come by the time taken to solve the puzzle. This ratio was laid out with respect to classifying a “scrabble” product into a puzzle or game because of the different rates specified in the Central Excise Tariff. The context behind distinguishing the two terms was limited to identifying the rate, and it may not be prudent to use this ratio in the context of the current provision. The tariff explicitly uses both the terms “puzzle” in the tariff heading of “toys” and “games” in Chapter 95, but Section 115BBJ uses the term “game” only. As discussed above, the word “game” is indefinite and can have various meanings. Thus, winning from online puzzles should be taxed under this provision. The CBDT should also clarify that the winnings from the online puzzles shall be taxed under this provision to avoid any dispute on the matter.

It can be said that the following elements may be found in a game:

(a) There are contesting parties which can be a single person, a team, or a computer algorithm;

(b) Rules are in place to play the game;

(c) It can be a game of skill or a game of chance;

(d) It is for amusement or entertainment.

3.3 Online games should be offered on the internet and accessed through a computer resource including any telecommunication device

Explanation (iii) to Section 115BBJ provides that “online game” means

“a game that is offered on the internet and is accessible by a user through a computer resource, including any telecommunication device”.

Explanation (ii) to Section 115BBJ defines the meaning of “internet” as “the combination of computer facilities and electromagnetic transmission media, and related equipment and software, comprising the interconnected worldwide network of computer networks that transmits information based on a protocol for controlling such transmission.”

In view of Explanation (i) to Section 115BBJ, read with section 144B of the Income-tax Act and Section 2(1)(k) of the Information Technology Act, 2000 “computer resource” shall mean computer, computer system, computer network, data, computer database or software.

The following elements should be present before categorising a game into an online game:

(a) It should be offered on the internet; and

(b) It should be accessible through a computer resource (including any telecommunication device).

A game offered through the app store, cloud or any website can be said to be offered through the internet. It is not necessary that the game should be downloaded on the computer, and a game played online is sufficient to conclude that it is offered on the internet. However, where a game is sold through offline channels like games on DVD or USB, it cannot be said to be offered through the internet. Similarly, games played in gaming zone or parlours not connected to Internet are not online games. Games played on the intranet (a private network that can only be accessed by authorised users within a specific organisation) are also not online games.

The term “telecommunication” device is so broad that it will cover every device with the technology to send signals, images and messages over long distances by radio, phone, television, satellite, etc²². Thus, on online game accessed from a laptop, mobile phone, Play station, console, or iPad²³ will be considered accessed from a computer or a telecommunication device.

3.4 Chargeability of winnings from online games

3.4.1 Chargeability of income

Section 115BBJ only provides for the tax rate and authorises the CBDT to prescribe how winning from online games shall be computed. The winning from online games shall be chargeable to tax as per extant provisions of the law, i.e., Section 4, Section 5, Section 9 and Section 14 of the Act.

Indian taxation is based on the principle of the residence of the person and the source of income. The worldwide income of Indian residents is taxable in India. Non-residents, however, are subject to source-based taxation. In the case of non-residents, only amounts received or accrued or so deemed to accrue or arise in India are subject to income tax in India.

Section 5(2)(b) provides, so far as taxability of income in India in the hands of a non-resident is concerned, that income from whatever source derived, accruing or arising to a non-resident in India during the relevant previous year shall be taxable in India.

Section 9 contains provisions as to when certain income shall be deemed to accrue or arise in India. Section 9 enumerates various categories of income under clauses (i) to (viii). Income falling under any of such clauses shall be deemed to accrue or arise in India. However, the ultimate tax liability of a non-resident person shall depend upon the Double Taxation Avoidance Agreement (DTAA) that India has entered into with various countries.

Where an income accrues or arises in India in view of Section 5, there cannot be any occasion to invoke the deeming fiction under Section 9²⁴.

The first test is Section 5 to check when and where the winnings from online games have accrued or arisen. In simple words, a non-resident shall be liable to pay tax in India if:

(a) the income accrues or arises during the previous year; and

(b) the place of accrual of such income is in India.

The words “accrue” and “arise” are not defined in the Act. According to the Oxford English Dictionary, “accrue” means “to fall as a natural growth or increment; to come as an accession or advantage”. The word “arise” is defined as “to spring up, to come into existence”. The income may accrue to an assessee without actual receipt of the same. If the assessee acquires a right to receive the income, it can be said to accrue to him, though it may be received later, on its being ascertained²⁵.

Regarding the place of accrual of income, the place of the first accrual or receipt of income is material. The place of accrual or receipt of an income is the place where the assessee receives the right in the character of income, and a mere transfer of money from one bank account to another bank account is not relevant²⁶.

*Sections 115BBJ, 194BA, 115BB, 194B, and 194BB

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8. Dr K.R. Lakshmanan v. State of Tamil Nadu [1996] 2 SCC 226.
9. Law Commission of India, Report No. 276. Available at: http://lawcommissionofindia.nic.in/reports/Report276.pdf.
10. In CIT v. G.R. Karthikeyan [1980] 4 Taxman 49 (Mad.), the High Court held that winning from a motor race is not a gambling nature and, therefore, the prizes won could not be winnings income from gambling or betting of any form. The Supreme Court, however, held that the income winning a motor rally still constitutes income under Section 2(24). Also see ITO v. Smt. Shukba Mukherjee [1987] 21 ITD 482 (Hyd.).
11. RMD Chamarbaugawala v. Union of India AIR 1957 SC 628
12. Manoranjithan Manamyil Mandram v. State of Tamil Nadu AIR 2005 Mad 261
13. State of Andhra Pradesh v. K Satyanarayana & Ors AIR 1968 SC 825
14. State of Andhra Pradesh v. K Satyanarayana & Ors AIR 1968 SC 825
15. Gurdeep Singh Sachar v. UOI [2019] 106 taxmann.com 290/75 GST 258/30 GSTL 441 (Bombay) = SLP dismissed by Supreme Court vide Gurdeep Singh Sachar v. UoI [2020] 115 taxmann.com 201 (SC)
16. K.R Lakshmanan v. State of Tamil Nadu AIR 1996 SC 1153.
17. K Satyanarayana(supra), K.R Lakshmanan(supra) and Rex v. Fortier 13 Q.B. 308
18. Jeffryes v. Evans 34 L. J. C. P. 263
19. Pleasantime Products v. CCE, (2009) 243 ELT 641 (SC)
20. Dr K.R. Lakshmanan v. State of Tamil Nadu, AIR 1996 SC 1153
21. Pleasantime Products v. CCE, (2009) 243 ELT 641 (SC)
22. Oxford Learner’s Dictionary
23. The Amritsar ITAT in the case of Kohinoor Indian (P.) Ltd. v. Asstt. CIT [2021] 129 taxmann.com 396/191 ITD 593 (Asr – Trib) held that iPad is a communication device.
24. Birla Corporation Ltd.v. Asstt. CIT [2015] 53 taxmann.com 1/153 ITD 679 (Jabalpur – Trib.)
25. Seth Pushalal Mansinghka (P.) Ltd. v. CIT [1967] 66 ITR 159 (SC)
26. Dr Sarmishtha Mukherjeev. ITO [2012] 22 taxmann.com 24/52 SOT 411 (Kol. – Trib.)