Kiran Raj

The Supreme Court's Division Bench of Justice Aravind Kumar and Justice Prasanna B. Varale held that the statutory penalty imposed on an employer for failing to pay compensation to an employee within the prescribed period cannot be transferred to or recovered from the insurance company, setting aside the Delhi High Court's order that had fastened such penalty liability upon New India Assurance Co. Ltd. The Court clarified that the penalty arises from the employer's personal default and negligence and must be borne solely by the employer.

The appeal arose from a challenge to a High Court order fastening liability on New India Assurance Co. Ltd. to pay penalty under Section 4A(3)(b) of the Employees’ Compensation Act, 1923, in addition to compensation and interest. The claim petition had been filed by the legal heirs of a deceased employee who collapsed while driving a commercial vehicle during the course of employment. The Commissioner held that an employer–employee relationship existed and awarded compensation of Rs. 7,36,680/- with interest at 12% per annum from the date of the incident. As the vehicle was insured, the employer was permitted to seek indemnification from the insurer.

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The Commissioner issued a show cause notice to the employer for delayed payment within one month as mandated under Section 4A. Upon failure to respond, penalty at 35% amounting to Rs. 2,57,838/- was imposed. On appeal, the High Court shifted primary liability for compensation, interest, and penalty to the insurer. The insurer admitted liability for compensation and interest but challenged the imposition of penalty, contending that penalty under Section 4A(3)(b) was attributable to the employer’s default and not indemnifiable.

The Court observed that “the core issue which arises for our consideration is whether the High Court has committed an error to fasten the liability of paying the penalty component under Section 4A(3)(b) of the Employees’ Compensation Act, 1923 upon the Appellant-Insurance Company in addition to the compensation and interest component?”

While examining the object of the legislation, the Court recorded that “the said legislation is a social welfare statute brought in by the parliament to redress the grievances of the employees in case of accidents that may occur in or during the course of employment by payment of adequate compensation expeditiously.” It further stated that “the Act is a social welfare legislation and, therefore, it must be given a beneficial construction.”

On the scope of Section 4A(3)(b), the Court noted that “the scope of the present appeal is thus, confined to the extent of determining the liability for paying the penalty component under Section 4A(3)(b) of the EC Act.” After tracing the legislative history, it observed that “the three components i.e., compensation, interest and penalty have been severed to form part of two different clauses within the same sub-section (3).” The Court stated that “the legislative intent behind severing the penalty component was to address larger predicament of easing the burden of indemnifiers who were adversely impacted by the obligation to pay the penalty.”

Rejecting the contention that the policy covered penalty, the Court recorded that “when the statute itself has obligated the employer to make the payment within one month, such obligation cannot be countenanced as sub-servient to any contractual obligation or bypassing the statutory obligation.”

Relying on precedent, the Court quoted that “so far as additional amount of compensation by way of penalty imposed on the insured employer under Section 4-A(3)(b) is concerned, however, the insurance company would not remain liable to reimburse the said claim and it would be the liability of the insured employer alone.” It also noted that “statutory penalty which is imposed upon the employer under section 4-A(3)(b) of the Act is not to be indemnified by the Insured.”

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The Court declared that “the present Appeal deserves to be allowed. Accordingly, it stands allowed. The Impugned Judgement and Order dated 21.05.2025 passed in F.A.O No. 147 of 2021 is set aside, so far as it imposes the liability of paying the penalty under Section 4A(3)(b) of Employees’ Compensation Act, 1923 on the Appellant-Insurance Company.”

“The said liability is fastened upon the Employer i.e., Respondent no. 4 herein to pay the amount of penalty of Rs. 2,57,838/- (Two Lakhs Fifty-Seven Thousand Eight Hundred Thirty-Eight Rupees Only) as Ordered by the Commissioner by Order dated 08.02.2021 within a period of eight (8) weeks from today. Rest of the findings of the High Court remains undisturbed. Pending applications, if any, shall stand disposed of.”

Advocates Representing the Parties

For the Petitioners: Mr. Salil Paul, Adv. Ms. Manjeet Chawla, AOR Mr. Sahil Paul, Adv. Mr. Sandeep Dayal, Adv. Ms. Kanupriya Mehta, Adv. Ms. Jyoti, Adv.

For the Respondents: Mr. Manish Maini, Adv. Mr. Akash, Adv. Mr. Mahesh Dutt Shukla, Adv. Mr. Abhimanyu Singh, Adv. Mr. Ram Chandra, Adv. Mr. Ashish Pandey, AOR.

Case Title: New India Assurance Co. Ltd. v. Rekha Chaudhary and Others
Neutral Citation: 2026 INSC 177
Case Number: Civil Appeal No. 174 of 2026
Bench: Justice Aravind Kumar and Justice Prasanna B. Varale