Supreme Court modifies penalty under Employees’ Compensation Act in motor accident claim: Sheela Devi vs. Oriental Insurance Company (2025)

Introduction

Date of the Judgment: April 17, 2025

Judges: J.K. Maheshwari and Aravind Kumar, JJ.

When an employee dies in a motor accident during employment, can the employer’s penalty for delayed compensation payment be reduced by the High Court? The Supreme Court addressed this issue in an appeal concerning the compensation awarded to the parents of a deceased employee. The core question revolved around the High Court’s justification for reducing the penalty initially imposed by the Employees Compensation Commissioner.

Case Background

Sheela Devi and another (Appellants), the parents of a 24-year-old employee, filed a claim for compensation following their son’s death in a motor accident during his employment with Respondent No. 2. The Employees Compensation Commissioner awarded Rs. 6,55,410 along with 12% interest per annum from the date of filing the claim. Additionally, a penalty of 50% of the award (Rs. 3,27,705) was imposed under Section 4A(3)(b) of the Employees’ Compensation Act, 1923. The Commissioner directed Respondent No. 1, the Insurer, to pay the entire amount.

The Oriental Insurance Company Limited (Respondent No. 1) challenged the order, leading the High Court to reduce the compensation to Rs. 4,36,940 with 12% interest from one month after the accident. The penalty was reduced to Rs. 30,000, and the liability for this penalty was assigned solely to Respondent No. 2, the Employer.

The Appellants contested the reduction of the penalty amount, arguing that the Insurer had already paid the full amount as initially awarded before appealing to the High Court. They also contended that the High Court disposed of the first appeal prematurely, without allowing them to file a counter-affidavit.

Timeline:

Legal Framework

The case primarily revolves around Section 4A of the Employees’ Compensation Act, 1923, which mandates the timely payment of compensation and specifies penalties for default.

Section 4A of the Employees’ Compensation Act, 1923:

“4A. Compensation to be paid when due and penalty for default . –
(1) Compensation under section 4 shall be paid as soon as it falls due.
(2) In cases where the employer does not accept the liability for compensation to the extent claimed, he shall be bound to make provisional payment based on the extent of liability which he accepts, and, such payment shall be deposited with the Commissioner or made to the employee, as the case may be, without prejudice to the right of the employee to make any further claim.
(3) Where any employer is in default in paying the compensation due under this Act within one month from the date it fell due, the Commissioner shall –
a. direct that the employer shall, in addition to the amount of the arrears, pay simple interest thereon at the rate of twelve per cent. per annum or at such higher, rate not exceeding the maximum of the lending rates of any scheduled bank as may be specified by the Central Government by notification in the Official Gazette, on the amount due; and
b. if, in his opinion, there is no justification for the delay, direct that the employer shall, in addition to the amount of the arrears and interest thereon, pay a further sum not exceeding fifty per cent. of such amount by way of penalty :
Provided that an order for the payment of penalty shall not be passed under clause (b) without giving a reasonable opportunity to the employer to show cause why it should not be passed.
Explanation. – For the purposes of this sub-section, “scheduled bank” means a bank for the time being included in the Second Schedule to the Reserve Bank of India Act, 1934.
(3A) The interest and the penalty payable under sub -section (3) shall be paid to the employee or his dependant, as the case may be.”

Section 4A(3)(b) allows the Commissioner to impose a penalty of up to 50% of the compensation amount if the employer defaults on payment without justifiable reason.

Arguments

Appellants’ Arguments:

• The entire amount awarded by the Commissioner had already been paid, and the award had been executed to finality by the Respondent No. 2 – Insurer, which had paid the amount to the Appellants prior to filing of the appeal before the High Court.
• Recovery of the difference between the amount as awarded by the Commissioner and the reduced amount awarded by the High Court should not be directed from the Appellants at this stage.
• The first appeal was disposed of by the High Court at the pre-admission stage without granting an opportunity to the Appellants to file a counter affidavit.

Respondents’ Arguments:

Respondent No. 1 – Insurer:

• The statutory penalty amount under Section 4A of the Act is discretionary in nature and therefore the reduction of the amount of penalty by the High Court requires no interference from this Court.
• Relying upon the judgement of this Court in Ved Prakash Garg Vs. Premi Devi and Ors. (1997) 8 SCC 1, it has been argued by the Insurer that the liability for payment of penalty amount has rightly been fixed by the High Court on the Respondent No. 2 – Employer.

Respondent No. 2 – Employer:

• The statutory penalty amount is discretionary in nature, and its reduction by the High Court in exercise of discretion warrants no interference by this Court.

Submissions Categorized by Main Submissions

Issues Framed by the Supreme Court

1. Whether the High Court was justified in interfering with the penalty amount directed by the Commissioner to be 50% of the award amount under Section 4A(3)(b) of the Act and reducing it to a fixed amount of Rs. 30,000/-.

Treatment of the Issue by the Court

Authorities

The court considered the following authorities:

• Ved Prakash Garg Vs. Premi Devi and Ors. (1997) 8 SCC 1 (Supreme Court of India): This case was cited by the Insurer to argue that the liability for the penalty amount should be fixed on the Employer.
• L.R. Ferro Alloys Ltd. v. Mahavir Mahto, (2002) 9 SCC 450 (Supreme Court of India): This case reiterated that the insurer is liable to indemnify the owner only for the compensation along with interest and not the penalty imposed on the employer for default in payment of amount within one month from the date of incident.
• Section 4A of the Employees’ Compensation Act, 1923: The court analyzed this section to determine the conditions under which a penalty can be imposed for delayed payment of compensation.

Authorities Considered by the Court

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Ved Prakash Garg Vs. Premi Devi and Ors. (1997) 8 SCC 1: The Court followed this authority, stating that “the Insurance Company shall compensate the Insured-Employer for the principal amount of compensation as well as interest thereon, however, in case any additional amount of compensation is awarded by the Commissioner by way of penalty, the same would be the liability of the insured -employer alone and not of the insurance company.”
• L.R. Ferro Alloys Ltd. v. Mahavir Mahto, (2002) 9 SCC 450: The Court followed this authority, holding that “the Insurer is liable to indemnify the owner only for the compensation along with interest thereon and not the penalty imposed on the employer for default in payment of amount within one month from the date of incident.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the lack of justification provided by the High Court for reducing the penalty amount. The Commissioner’s specific finding that the employer had not paid any amount to the claimants at the time of injury or when the claim was filed was a critical factor. The Court emphasized that such a finding of fact should not have been interfered with without a contrary finding that the employer had indeed made some payments within one month of the accident.

Fact:Law Ratio

Logical Reasoning

Issue: Was the High Court justified in reducing the penalty amount?

Flowchart:

Commissioner Imposed 50% Penalty

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High Court Reduced Penalty to Rs. 30,000

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Supreme Court Examined High Court’s Justification

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High Court Provided Insufficient Justification

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Supreme Court Modified Penalty to 30%

Key Takeaways

• The High Court must provide clear reasons when reducing a penalty imposed by the Employees Compensation Commissioner.
• The Commissioner’s findings of fact regarding non-payment by the employer are significant and should not be easily overturned.
• The liability for the penalty amount rests solely with the employer, not the insurer.

Directions

1. The Insurer shall recover Rs. 1,31,082/- from the Respondent No. 2 – Employer.
2. The Insurer shall recover Rs. 4,15,093/- being excess compensation and penalty from the Appellants.
3. The Respondent No. 1 – Insurer is at liberty to take recourse of law as permissible.

Development of Law

The ratio decidendi of the case is that while the High Court has the discretion to modify penalties imposed under Section 4A(3)(b) of the Employees’ Compensation Act, 1923, such modifications must be supported by clear and justifiable reasons. The court reinforced the principle that the insurer is liable for compensation and interest, but the employer is solely responsible for penalties arising from delayed payments.

Conclusion

The Supreme Court partly allowed the appeals, modifying the High Court’s order by setting the penalty at 30% of the compensation amount, to be borne solely by the employer. The court emphasized the need for the High Court to provide clear reasons when altering penalty amounts and directed the insurer to recover the revised penalty from the employer and the excess amount from the appellants.