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CMA Intermediate · Direct and Indirect Taxation · Tax Deducted at Source and Tax Collected at Source

Sharma Castings Pvt. Ltd., a resident manufacturer, buys scrap from a seller for use in producing articles. It gives a written declaration in the prescribed form that the scrap will be used for manufacturing and not for trading. Under section 394 of the Income-tax Act, 2025, the seller:

The seller need not collect tax, but must deliver one copy of the declaration to the Commissioner by the seventh day of the month after receiving it. The buyer is a resident using scrap for manufacturing and not for trading, so section 394(2) exempts collection.

  1. AMust collect TCS at 2% regardless of the declaration
  2. BMust collect TCS at 1% since the buyer is a manufacturer
  3. CNeed not collect tax, and must deliver a copy of the declaration to the Commissioner by the seventh day of the following monthCorrect
  4. DNeed not collect tax and need not forward the declaration to any authority

Explanation

Section 394(2) exempts collection on Sl. Nos. 1 to 5, which include scrap, where a resident buyer furnishes a declaration of use for manufacturing, processing, producing or power generation and not for trading. Under 394(3) the seller must deliver one copy to the Commissioner on or before the seventh day of the month following receipt of the declaration. Hence the 2% and 1% options are wrong, and the last option ignores the filing duty.

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