http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

CASE NO.: Appeal (civil)  399 of 2004

PETITIONER: National Insurance Co. Ltd.                              

RESPONDENT: Keshav Bahadur and Ors.                                  

DATE OF JUDGMENT: 20/01/2004

BENCH: DORAISWAMY RAJU & ARIJIT PASAYAT

JUDGMENT: J U D G M E N T (Arising out of SLP (Civil) No. 12305/2002)

ARIJIT PASAYAT, J.

       Leave granted.

       National Insurance Company Limited (hereinafter  referred to as ’the insurer’) questions legality of the  judgment of a Division Bench of the Jharkhand High Court  holding that the insurer has to pay the compensation of  Rs.72,000/- awarded to the legal representatives of one  Hasta Bahadur (hereinafter referred to as ’the deceased’)  who lost his life in a vehicular accident on 5.6.1987.  The  deceased was working as a Chowkidar of Hydel Project,  Sikidri.  A claim petition was filed by his sons under  Section 110A of the Motor Vehicles Act 1939 (in short ’the  Act’). The Motor Vehicle Accidents Tribunal (hereinafter  referred to as ’the Tribunal’) awarded compensation of  Rs.72,000/- along with interest @ 12% per annum.  The amount  was directed to be paid within 60 days.  It was further  directed that in case of failure to pay within 60 days, the  rate of interest would be 18%.  The insurer questioned the  legality of the direction that the whole amount of  compensation was to be paid by the insurer; and the  direction regarding default rate of interest. According to  it, the liability was limited to Rs.50,000/- in terms of  Section 95(2)(b)(i) of the Act; and there was no legal basis  for the default rate. Though these points were specifically  urged before the Tribunal, no definite finding was recorded.   Similar was the situation so far as the High Court is  concerned.  Though it dealt with the question of interest  and reduced the rate from 12%, as awarded by the Tribunal,  to 9% per annum, no finding was recorded regarding legality  of default rate.   

       Learned counsel for the appellant-insurer submitted  that the liability statutorily fixed in respect of third  party risk was at the relevant point of time Rs.50,000/-.  With reference to copy of the policy of insurance, which was  produced before the Tribunal and the High Court it is  pointed out that a sum of Rs.240/- was paid as the third  party insurance premium.  The limits of liability were also  indicated in the following terms:                

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

"Limits of Liability:

(a)     Limit of the amount of the Company’s  liability under Section II-I (i) in  respect of any one accident.

       Such amount as is necessary to meet  the requirements of the Motor Vehicles  Act, 1939.

(b)     Limit of Amount of the Company’s  Liability under Section II-I((ii) in  respect of any one claim or series of  claims arising out of the one event:  Rs.50,000/-"

       In the Schedule of premium under the heading B.  "LIABILITY TO PUBLIC RISK" it was indicated to be Rs.  240/-. The stand in essence, therefore, is that when extra  premium, if any, is not paid, for any enhanced liability,  the statutorily fixed liability of Rs.50,000/- was the  maximum that could have been awarded and nothing beyond it.   It is also submitted that the High Court had directed  payment of the amount within a particular time with the  default stipulation of higher penal interest @ 18% p.a.  It  took note of the fact that pursuant to the order dated  23.2.1998 insurer deposited Rs.50,000/- on 6.3.1998. It was  pointed out that neither the Tribunal nor the High Court  could have stipulated any penal interest as was done.  The  High Court directed payment of the balance amount of  compensation with interest and had stipulated that in case  insurer does not pay the balance amount with interest at  the rate indicated in the judgment penal interest @ 18% was  to be paid. It was submitted that there is no provision for  any penal interest. The only provision relating to interest  is Section 110CC of the Act.   

There is no response by the respondents in spite of  the service of notice.

The liability of the insurer is limited as indicated  in Section 95 of the Act.  But it is open to the insured to  make payment of additional higher premium and for insurer  to accept higher risk covered in respect of third party  also. But in the absence of any such clause in the  insurance policy, and proof of payment of additional  premium the liability of the insurer cannot be unlimited in  respect of third party and it is limited only to the  statutory liability.  A three-Judge Bench of this Court in  New India Assurance Company Limited v. Shanti Bai (1995 (2)  SCC 539) held as follows:

"(i) a comprehensive policy which has been  issued on the basis of the estimated value  of the vehicle does not automatically result  in covering the liability with regard to  third-party risk for an amount higher than  the statutory limit,  (ii) that even though it is not permissible  to use a vehicle unless it is covered at  least under an "Act only" policy, it is not  obligatory for the owner of a vehicle to get

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

it comprehensively insured, and  (iii) that the limit of liability with  regard to third-party risk does not become  unlimited or higher than the statutory  liability in the absence of specific  agreement to make the insurer’s liability  unlimited or higher than the statutory  liability."

       In case insurer-appellant not taking any higher  liability by accepting higher premium, the liability is  neither unlimited nor higher than the statutory liability  fixed under Section 95(2) of the Act. Even if a vehicle is  the subject matter of comprehensive insurance and a higher  premium is paid on that score, limits of the liability with  regard to third party risk does not become unlimited or  higher beyond the statutory liability fixed.  For this  purpose, a specific agreement has to be arrived at between  the insured and the insurer and separate premium has to be  paid in respect of additional amount of liability  undertaken by the insurer in that regard.  This position  was highlighted by this Court in National Insurance Co.  Ltd. v. Jugal Kishore (1988 (1) SCC 626).  In New India  Assurance Co. Ltd. v. C.M. Jaya and others (2002 (2) SCC  278) a Constitution Bench approved the view taken in Shanti  Bai (supra) and Jugal Kishore (supra). It was held that in  case of insurer not taking any higher liability by  accepting higher premium for payment of compensation to  third party, the insurer would be liable to the extent  limited under Section 95(2) of the Act and would not be  liable to pay the entire amount of compensation awarded.         The inevitable conclusion on the factual backgrounds  is that the liability of the insurer-appellant is limited  to Rs.50,000/-. The residual question is whether there  could be any stipulation of penal rate of interest as done  by the Tribunal and affirmed by the High Court.  So far as  the higher rate of interest stipulation is concerned, it is  to be noted that grant of interest under Section 110CC of  the Act (corresponding to Section 171 of the Motor Vehicles  Act, 1988) (in short the ’new Act’) is discretionary. The  purpose for award of interest is to put pressure on the  relevant person not to delay in making the payment; and, to  compensate the victim or his dependents at least to some  extent for such delay as may occur, by way of interest. In  determining the quantum of interest awardable under the  relevant Section, the Tribunal acting under Section 110 of  the Act corresponding to Section 166 of the new Act can  derive direct guidance from Section 34 of the Code of Civil  Procedure, 1908 (in short the ’CPC’). In fact, the  provisions require payment of interest in addition to  compensation already determined. Even though the expression  ’may’ is used, a duty is laid on the Tribunal to consider  the question of interest separately with due regard to the  facts and circumstances of the case. The provision is  discretionary and is not and cannot be bound by rules. In  the words of Lord Cairns, L.C. in Julius v. Bishop of  Oxford (1880 (5) AC 214), "But there may be something in  the nature of the thing empowered to be done, something in  the object for which it is to be done, something in the  conditions under which it is to be done, something in the  title of person or persons for whose benefit the power is  to be exercised, which may couple the power with a duty,  and make it the duty of the person in whom the power is  reposed to exercise that power when called upon to do so".  This classic observation has been quoted with approval by

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

this Court in several cases. (See Commissioner of Police v.  Gordhandas Bhanji (AIR 1952 SC 16 and S.P. Gupta and Ors.  v. President of India and Ors. (AIR 1982 SC 149). In  Halsbury’s Laws of England, 4th Edn., Vol.I, it has been  observed:-          Para 28: Duty and discretion.

xxx                     xxx                             xxx          

"A statutory discretion is not,  however, necessarily or, indeed, usually  absolute; it may be qualified by express and  implied legal duties to comply with  substantive and procedural requirements  before a decision is taken whether to act  and how to act. Moreover, there may be a  discretion whether to exercise a power, but  no discretion as to the mode of its  exercise; or a duty to act when certain   conditions are present, but a discretion how  to act. Discretion may thus be coupled with  duties".    

Discretion, in general, is the discernment of what is  right and proper.  It denotes knowledge and prudence, that  discernment which enables a person to judge critically of  what is correct and proper united with caution; nice  discernment, and judgment directed by circumspection;  deliberate judgment; soundness of judgment; a science or  understanding to discern between falsity and truth, between  wrong and right, between shadow and substance, between  equity and colorable glosses and pretences, and not to do  according to the will and private affections of persons.  When it is said that something is to be done within the  discretion of the authorities, that something is to be done  according to the rules of reason and justice, not according  to private opinion; according to law and not humour. It is  to be not arbitrary, vague, and fanciful, but legal and  regular.  And it must be exercised within the limit, to  which an honest man, competent to the discharge of his  office ought to confine himself (Per Lord Halsbury, L.C., in  Sharp v. Wakefield, (1891) Appeal Cases 173).  Also (See  S.G. Jaisinghani v. Union of India and Ors. (AIR 1967 SC  1427).   

       The word "discretion" standing single and unsupported  by circumstances signifies exercise of judgment, skill or  wisdom as distinguished from folly, unthinking or haste;  evidently therefore a discretion cannot be arbitrary but  must be a result of judicial thinking. The word in itself  implies vigilant circumspection and care; therefore where  the legislature concedes discretion it also imposes a heavy  responsibility.

"The discretion of a Judge is the law of tyrants; it  is always unknown. It is different in different men. It is  casual, and depends upon constitution, temper, passion. In  the best it is often times caprice; in the worst it is every  vice, folly, and passion to which human nature is liable,"  said (Lord Camden, L.C.J., in Hindson and Kersey (1680) 8  How, St. Tr.57.)

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5  

If a certain latitude or liberty accorded by statute or  rules to a judge as distinguished from a ministerial or  administrative official, in adjudicating on matters brought  before him, it is judicial discretion. It limits and  regulates the exercise of the discretion, and prevents it  from being wholly absolute, capricious, or exempt from  review.  

Such discretion is usually given on matters of  procedure or punishment, or costs of administration rather  than with reference to vested substantive rights. The  matters which should regulate the exercise of discretion  have been stated by eminent judges in somewhat different  forms of words but with substantial identity.  When a  statute gives a judge a discretion, what is meant is a  judicial discretion, regulated according to the known rules  of law, and not the mere whim or caprice of the person to  whom it is given on the assumption that he is discreet (Per  Willes J. in Lee v Budge Railway Co., (1871) LR 6 CP 576,  and in Morgan v. Morgan, 1869, LR 1 P & M 644).  

Though Section 110CC of the Act (corresponding to  Section 171 of the New Act) confers a discretion on the  Tribunal to award interest, the same is meant to be  exercised in cases where the claimant can claim the same as  a matter of right. In the above background, it is to be  judged whether a stipulation for higher rate of interest in  case of default can be imposed by the Tribunal. Once the  discretion has been exercised by the Tribunal to award  simple interest on the amount of compensation to be awarded  at a particular rate and from a particular date, there is  no scope for retrospective enhancement for default in  payment of compensation. No express or implied power in  this regard can be culled out from Section 110CC of the Act  or Section 171 of the new Act. Such a direction in the  award for retrospective enhancement of interest for default  in payment of the compensation together with interest  payable thereon virtually amounts to imposition of penalty  which is not statutorily envisaged and prescribed. It is,  therefore directed that the rate of interest as awarded by  the High Court shall alone be applicable till payment,  without the stipulation for higher rate of interest being  enforced, in the manner directed by the Tribunal.    

The insurer cannot withhold the awarded amount  indefinitely. In the circumstances, we direct that interest  @ 9% per annum on the sum of Rs.50,000/- which is the  liability of the insurer; from the date of claim till  6.3.1998, be paid within a period of three months from  today, if not already paid or deposited before the  Tribunal/High Court. The appeal is allowed to the extent  indicated, without any order as to costs.