The party's vote share declined to 13 per cent as against 47 per cent in 2015 Assembly polls.
AAP candidate Harjeet Singh polled 10,243 votes as compared to his BJP rival Majinder Singh Sirsa, who got 40,602 votes.
This is the party's second loss in less than two months after its poor show in Punjab and Goa.
Senior party leader and Deputy Chief Minister Manish Sisodia attributed the defeat to its ex MLA Jarnail Singh, who quit as legislator to contest from Punjab against its former Chief Minister Parkash Singh Badal from Lambi and said people were "upset" over this.
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"There was anger among people after Jarnail (Singh) went to Punjab. We tried convincing them but with the results we are realising that people were not convinced and remained upset," Sisodia said.
Interestingly, the party had kept Singh away from by-poll campaiging.
Following Sisodia's remarks, Singh said, the party needs to do an honest introspection.
"Win or loss is part of the electoral politics, but the party needs a deep and honest introspection. Party fights collectively and win or loss is a collective responsibility," he said.
He, however, declined to elaborate on his remarks.
The AAP sought to put on a brave face even as there is a fear that the loss could have an effect on the party's prospects in the civic body polls, scheduled on April 23.
"We will pull up our socks in the upcoming polls and also try to convince the people of Rajouri Garden. Whatever work was done by Jarnail, we will carry it forward.
"After winning 282 seats in the Lok Sabha, the BJP lost many bypolls. We will win the MCD polls by telling people about the work done by us and we will win it handsomely," Sisodia said.
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