While passing the order, Additional Sessions Judge Rakesh Pandit did not agree with the agency's plea seeking seven more days' custody of Shah on the ground that it needed to unearth the larger conspiracy.
The ED's plea was opposed by Shah's counsel M S Khan.
The sixty-four-year-old separatist leader, who was arrested on July 25, was produced in the court after expiry of his seven-day ED custody.
According to the prosecution, Wani had claimed that he had given Rs 2.25 crore to Shah.
The ED had registered a criminal case under the Prevention of Money Laundering Act (PMLA) against Shah and Wani.
Wani was arrested with a large cache of ammunition and Rs 63 lakh, allegedly received through 'hawala' channels from the Middle East, on August 26, 2005, it had said.