The contentions in the PIL filed by former police officer Julio Rebeiro were not valid as Pandey had been appointed on a temporary basis, it said.
Rebeiro has challenged Pandey's appointment.
The division bench of Chief Justice R Subhash Reddy and Justice V M Pancholi later posted the PIL for hearing on June 15.
Pandey, currently director of the Anti Corruption Bureau, is holding an additional charge as state DGP since April following the unexpected transfer of P C Thakur to Delhi.
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As to the PIL's contention that Pandey may interfere in the investigation against him by influencing the witnesses, the Government claimed that no such thing had happened ever since he took over as the in-charge DGP.
His bail conditions too did not say that he cannot be given a promotion or made an in-charge DGP, the reply said.
The special CBI court granted bail to Pandey in February in the Ishrat fake encounter case.
Rebeiro, who at one time had served as DGP in Gujarat, and acquired the moniker 'supercop' due to his success in battling the insurgency in Punjab later, contends that Pandey's authority due to his post will influence witnesses, many of whom are serving police officers.