One of the restrictions for claiming deductions u/s 80J(corresponding sections 80IA/IB) is that the unit is not formed by the transfer to a new business of machinery or plant previously used for any purpose. In CIT v. Orissa Cement Ltd. (254ITR24) the Delhi High Court explained that such a restriction has application only as far as machinery previously used by the same assessee earlier and therefore has no application as far as purchase of old assets from outside. Hence an assessee is free to employ old assets for setting up a new unit, which qualify for the purpose of deduction u/s 80IA/IB. The Court further explained that the purpose of putting such restriction is to prevent an assessee to claim double benefit of depreciation as well as deduction under section 80IA/IB. Also the Court held that the Explanation 2 referring to 20% cap does not refute such an interpretation but rather provide an additional support to the dominant object of the Act. In other words the 20% cap has application only as far as employment of assets transferred from one unit to another unit.
The Delhi High Court in this case followed Calcutta decision in CIT v. Sainthia Rice & Oil Mills (82ITR778) to hold that the transfer for this purpose would mean transfer to the new business of the transferee of any machinery used by the said transferee in his old business. The Delhi High Court failed to make note of the earlier Supreme Court ruling in Bajaj Tempo Ltd. Vs. Commissioner of Income-tax (196ITR188) where the Court disapproved such view held by the Calcutta High Court in Sainthia case that previously used in any other business” can be construed so narrowly as to confine it to the building of the assessee only. It is not correct to say that the transfer of a building to the new business to disentitle the new undertaking to relief should have been the transfer of a building of the assessee only.
The Delhi High Court also failed to make note of their previous decision in the case of this very assessee in Orissa Cement Ltd. v. Commissioner of Income-tax (200ITR636). Following their earlier view in Ganga Sugar Corporation’s case  92 ITR 173 the High Court held that, in order to hold that an industrial undertaking had been formed by the transfer to a new business of building, machinery or plant previously used in any other business, the court should take into account the value of the transferred building, machinery or plant vis-à-vis the total cost involved in the setting up of the new industrial undertaking. If, in the context of the total cost involved in the setting up of the new industrial undertaking, the value of the transferred building, machinery or plant constitutes only a small fraction, the new industrial undertaking would not be held to have been formed by the transfer to a new business of building, machinery or plant previously used in any business. It is only if the value of the transferred building, machinery or plant is substantial when compared to the total cost involved in the setting up of the new industrial undertaking, could the said undertaking be regarded as being hit by the restriction under the section.
The percentage of old assets used in the earlier decision in the case of this very assessee was 1% while in the recent case it was noted that as much as 34% of the assets used in the formation were old. The ruling is bound to be challenged on this very ground in the Supreme Court.