The home ministry, after perusing the documents submitted by the CBI, rejected the agency's plea, official sources said but did not elaborate the grounds on which the sanction has been turned down.
The CBI had submitted its final report in the case to the home ministry, which is the cadre controlling ministry for IB personnel, two years back.
Former IB Director Asif Ibrahim had opposed the move to prosecute his officers during his tenure which ended in December last year.
The CBI has been informed the Home Ministry decision to deny sanction to prosecute Kumar and three others in the killing of Ishrat, a 19-year-old Mumbra college student, and three others in the encounter that took place on outskirts of Ahmedabad in 2004.
Kumar, an IPS officer of 1979 batch, who retired about two years ago, was posted as joint director of IB in Ahmedabad when the Ishrat encounter took place.
The former IB officer was questioned by CBI twice regarding his alleged role in the conspiracy to carry out the encounter.
CBI sources had maintained that they had evidence that Kumar was one of the officers who had interrogated Ishrat when she was allegedly taken into illegal custody by Gujarat Police before being killed in the encounter.
Kumar was reportedly questioned at length with regard to the alleged interrogation and other inputs which suggested his possible role in the conspiracy leading to the encounter.
The retired IPS officer was alleged to have generated intelligence input that a group of Lashkar terrorists were coming to Ahmedabad to target Gujarat CM Narendra Modi.
Almost all accused in the case got bail from court. IPS officers D G Vanzara and P P Pandey were granted bail in February. N K Amin, another accused, was reinstated by the Gujarat Home Department as Deputy Superintendent of Police (DySP) in the State Crime Records Bureau (SCRB) at Gandhinagar early this month.
In the encounter, Ishrat Jahan, her friend Pranesh Pillai alias Javed Sheikh along with two suspected Pakistanis -- Amjad Ali Rana and Zeeshan Johar -- were gunned down by Gujarat crime branch officials.
The crime branch had then claimed that the four of them were Lashkar-e-Tayiba operatives who had reached Gujarat to kill the then Chief Minister Narendra Modi.