Justice Chandrashekaraiah was appointed to the post Jan 21 last year by the then government headed by D.V. Sadananda Gowda.
The decision increases pressure on Gowda's successor Jagadish Shettar to fill up the post of Lokayukta, vacant since Sep 19, 2011 after former Supreme Court judge Shivaraj Patil quit over owning two house plots from two cooperative housing societies in Bangalore.
While a state government spokesperson said that the apex court ruling would be studied in detail before commenting, the main opposition, the Congress demanded immediate appointment of Lokayukta.
Talking to reporters in north Karnataka town of Koppal soon after the apex court ruling, state Congress chief G. Parameshwara said at least now the Bharatiya Janata Party (BJP) government should not delay the appointment of Lokayukta.
The Congress has been pressing for filling up the post of Lokayukta for long and had approached Governor H.R. Bhardwaj to do so following the recent ruling of the apex court upholding the decision of Gujarat governor to appoint a Lokayukta.
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In Friday's judgment, the apex court ruled that the chief minister had not held "meaningful" consultation with the chief justice (of the high court) before the appointment, noting such consultation was mandatory.
The court, however, said there was nothing against Justice Chandrashekaraiah and he could be considered by the state government for the post again.
The ruling came on a petition by the state government challenging the state high court decision of last April setting aside the appointment.
The governments of Gowda as well as Shettar had been justifying keeping the Lokayukta post vacant on the ground that the state had challenged in the Supreme Court the high court quashing the appointment of Upa Lokayukta.
The state had also questioned the high court ruling giving primacy to the opinion of the high court chief justice in appointment of Lokayukta and Upa Lokayuktas.
Karnataka has two Upa Lokayuktas.