A bench of Chief Justice P Sathasivam, justices Ranjan Gogoi and N V Ramana granted the relief to Pandian.
The IPS officer had moved the apex court in December, 2013 after the Bombay High Court on November 20 last year rejected his bail application.
The CBI had opposed the bail application in the high court, saying the police officer is a key accused who had picked up the duo from Hyderabad before they were killed in the alleged fake encounter.
Pandian, along with IPS officer Abhay Chudasma, Rajasthan cadre IPS officer Dinesh M N and some other policemen are lodged in Taloja jail in Navi Mumbai after the Supreme Court transferred the trial in the case to Mumbai from Ahmedabad.
The other accused IPS officer, D G Vanzara, was brought back to Ahmedabad in connection with the case of alleged encounter of Ishrat Jahan and three others and remains lodged in Sabarmati Central Jail.
Former Gujarat minister of state for home and BJP leader Amit Shah, who is out on bail, is also an accused in the case.
Sheikh and his wife were allegedly abducted by Gujarat's Anti-Terrorist Squad from Hyderabad and killed in a suspected fake encounter near Gandhinagar in November 2005.
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