Tripurasura had conquered the whole world and defeated the gods and also created three cities in space, together called "Tripura".
The killing of the demons and destruction of their cities with a single arrow - by Shiva overjoyed the gods and they pronounced the day as a festival of illuminations.
This day is also called "Dev-Diwali" - the Diwali of the gods. Diwali is the Hindu festival of lights.
