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CMA Final · Direct Tax Laws and International Taxation · Collection, Recovery and Refund of Tax

Mehta Metals Ltd, a resident manufacturer, buys scrap worth Rs 5,00,000 from Kapoor Traders and furnishes a written declaration in duplicate that the scrap will be used for manufacturing and not for trading. Which statement follows from section 394 of the Income-tax Act, 2025?

No tax is collected, because a resident buyer furnished the prescribed declaration of use in manufacturing and not trading. However, the seller must deliver one copy of the declaration to the specified Commissioner or higher authority by the seventh day of the month following receipt of the declaration.

  1. AKapoor Traders collects 2% tax, i.e. Rs 10,000, because the declaration is relevant only for exports
  2. BKapoor Traders collects no tax, and must deliver one copy of the declaration to the specified Commissioner by the seventh day of the following monthCorrect
  3. CKapoor Traders collects 1% tax, i.e. Rs 5,000, at the reduced rate for manufacturers
  4. DKapoor Traders collects no tax and need not forward the declaration to any authority

Explanation

For Sl. Nos. 1 to 5 (including scrap), no collection is made from a resident buyer who gives the prescribed declaration for manufacturing or processing use and not for trading. The seller must then deliver a copy of the declaration to the Commissioner-level authority on or before the seventh day of the following month. Hence the option that says no forwarding is needed is wrong.

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