Supreme Court fixes statutory penalty at 30% of compensation, directs insurer to pay award and recover penalty from employer

A bench of Justices J.K. Maheshwari and Aravind Kumar heard an appeal by the parents of a deceased employee challenging orders of the Himachal Pradesh High Court which had reduced both the compensation and the statutory penalty awarded in an employees’ compensation claim arising from a fatal motor accident. The appellants contested only the reduction of the penalty imposed under Section 4A(3)(b) of the Employees’ Compensation Act, 1923; the insurer and the employer defended the High Court’s exercise of discretion.

The Court held that the statutory penalty under Section 4A(3)(b) was payable by the employer alone and was not indemnifiable by the insurer, and that the High Court erred in interfering with the Commissioner’s factual finding without giving reasons for reducing the penalty to a lump sum. The Court followed the settled principle in Ved Prakash Garg that an insurer was liable for the principal compensation and interest but not for any penal amount imposed on the employer. The bench modified the penalty from the Commissioner’s 50% of the award and the High Court’s fixed Rs.30,000 to a 30% penalty on the compensation quantified by the High Court, and directed practical adjustments to account for payments already made. The Court observed that “the statutory penalty which is imposed upon the employer under Section 4A(3)(b) of the Act is not to be indemnified by the Insurer.” The Court, in its reasoning, observed: "It is clear from reading Section 4A(3)(b) that in case where the Employer has defaulted in payment of compensation due under the Act within one month from the date it fell due and the Commissioner is of the opinion that there is no justification for the delay, the employer shall be directed to pay a further sum to the maximum of 50% of the award amount, by way of penalty. Therefore, the necessary pre-requisite for imposing the statutory penalty under Section 4A(3)(b) is that the employer must default in payment of compensation due and the Commissioner must reach the conclusion that the non-payment is not justifiable."

Background The dispute arose after a 24‑year‑old employee died in a motor accident while in the course of employment. The Employees’ Compensation Commissioner awarded Rs. 6,55,410 as compensation with interest at 12% per annum and imposed a statutory penalty of 50% under Section 4A(3)(b), fixing liability to pay the entire amount on the insurer. The insurer filed an appeal; the High Court reduced the compensation to Rs. 4,36,940 with interest and reduced the penalty to Rs. 30,000, while fixing liability for the reduced penalty on the employer alone. The appellants did not challenge the quantum of compensation reduced by the High Court but contested the reduction of the penalty, asserting that the full award as made by the Commissioner had already been paid to them by the insurer before the High Court’s decision and that they should not be made to refund the difference.

The insurer and employer maintained that the imposition and quantum of penalty were discretionary and that liability for penalty lay on the employer, relying on Ved Prakash Garg and subsequent authorities. The Supreme Court reviewed Section 4A(3)(b) and held that the statutory pre‑requisite for penalty were default in payment within one month and a Commissioner’s satisfaction that the delay was unjustified. The Court found that the High Court had not recorded any basis for reducing the Commissioner’s penalty to a lump sum and that the Commissioner had made a specific factual finding that the employer had not paid any amount when the claim was filed. In the peculiar facts of the case the Court fixed the statutory penalty at 30% of the compensation amount, while leaving the High Court’s determination of compensation and interest undisturbed. The Court directed that the insurer should pay the appellants the amounts receivable and then recover Rs. 1,31,082 (30% of Rs. 4,36,940) from the employer; it also directed the insurer to recover Rs. 4,15,093 being excess compensation and penalty paid earlier from the appellants. The appeals were allowed in part and disposed of with liberty to the insurer to take recourse to law as permissible.

Case Details: Case No.: 2025 INSC 516 Case Title: Sheela Devi & Anr. v. Oriental Insurance Company Limited & Anr. Appearances: For the Petitioner(s): [Not indicated in the judgment] For the Respondent(s): [Not indicated in the judgment]