"The CBI's plea stands rejected," CBI court judge S G Dighe said, dismissing the plea.
The judge said even though Governor K Sankaranarayanan had rejected CBI's plea for sanction to prosecute Chavan, he could be tried under the Prevention of Corruption act as he has been accused of criminal misconduct.
The judge will pass a detailed order later in the day.
In the course of arguments, Special Public Prosecutor Bharat Badami said the CBI would be "very happy" to prosecute the former Chief Minister but "our hands are tied".
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The CBI had on January 15 filed an application to allow it to remove Chavan's name from the list of 13 accused charge-sheeted in the case, citing the Governor's decision, which it said was "non-appealable".
The court had reserved its order on the application for today.
Acceptance of CBI's plea by the court would have come as a big relief for both Congress and Chavan, the only former Chief Minister to have been made accused in the case though two of his predecessors--Vilasrao Deshmukh and Sushilkumar Shinde-- were also under the lens. Deshmukh has since died.
The judicial panel's report had said, "There was certainly a nexus between the acts of Chavan and benefits derived by his close relatives. The membership process clearly indicates that grant of requisite permission by Chavan was by way of quid pro quo."
Chavan (55), who had to step down as chief minister after the scam surfaced, had challenged his inclusion in the charge sheet on the ground that no sanction for prosecution had been obtained from the Governor. The CBI had maintained that since he was a former Chief Minister at the time of being charge-sheeted, gubernatorial approval was not required.