"Prima facie there is no case against Ravi Shankaran," a two-member bench of the high court comprising Lord Brian Leveson and Justice Blake, ruled on Tuesday.
The bench said the court in India has not even commenced the trial till date, though the case was filed in June 2006.
The court also asked the CBI to pay legal costs amounting to more than Rs 1 crore to 47-year-old Shankaran.
The CBI has 14 days to appeal to the Supreme Court.
The court ruling overrides the extradition order of British Home Secretary Theresa May in May last year and the earlier decision of District Judge Nicolas Evans.
Shankaran had challenged the home secretary's order in the high court.
The court heard the case for two days in February this year and gave its ruling on Tuesday.
Shankaran is the key accused in the case of leaking classified information from the War Room to arms dealers. He has been absconding since the case was registered by the CBI in March 2006.
The CBI revoked his passport in May that year and secured a Red Corner Notice against him after filing a charge-sheet in July 2006.
An extradition request was sent to the UK in 2007 following reports that he was in the country and he was arrested by UK authorities in April 2010 on the basis of the non-bailable arrest warrants issued by the Court of Chief Metropolitan Magistrate, New Delhi.
Besides Shankaran, who is out on conditional bail, other accused in the case include sacked naval commander V K Jha, former Indian Air Force wing commander S L Surve and businessmen Abhishek Verma.
The case involves leakage of over 7,000 pages of defence information of sensitive nature from the naval war room and air defence headquarters.
Image: Ravi Shankaran, key accused in the Naval War Room leak case
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