A division bench of acting Chief Justice V M Sahai and Justice R P Dholaria allowed the Sardar Patel Smarak Trust, which operates from the palace, to carry out the construction.
According to the petition filed by Umang Huthisingh, the palace, built in 1621, was notified as a protected monument by British government in 1904.
However, after the formation of Gujarat state in 1960, the palace was removed from the list of protected monuments and housed the Governor's office for some time.
The court had on September 19 sought a response from the Centre and Archaeological Survey of India on whether the palace can be notified again as a protected monument.
Senior advocate Krishnakant Vakharia, appearing for the Trust, today submitted that the HC itself had held in 1983 that it did not fall in the protected heritage category.