Tarun Barot, currently posted at Mehsana in North Gujarat, was arrested after his interrogation by the Central agency which is looking into the case since last year.
"Barot was called for interrogation at the CBI office in Gandhinagar today and later arrested," CBI officials said.
Ketan Tirodkar, a former Mumbai-based journalist, who is now an accused in the case, had provided vital information regarding Barot's involvement in the encounter. Tirodkar was arrested in July this year.
"In a statement made before the MCOCA Court in Mumbai, Tirodkar had maintained he saw Mumbai encounter specialist Daya Nayak hand over Sadiq to (suspended IPS officer) D G Vanzara and another person, whom he later identified as Tarun Barot," CBI sources said.
They said after his arrest on July 5, Tirodkar had given a confessional statement before a Magisterial Court, in which also he had named Barot.
Barot, who was at Detection of Crime Branch, Ahmedabad before being transferred as DySP in Mehsana, is a suspect in another controversial encounter - that of Mumbai girl Ishrat Jahan and three others of 2004 - also being probed by CBI. Barot is second accused to be arrested in the Sadiq case.
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The Gujarat High Court had in June 2011 ordered a CBI probe into the killing of Sadiq involving high-rank police officers, including Vanzara, a key accused in the Sohrabuddin Sheikh fake encounter case.
Crime Branch had then claimed Sadiq was a notorious criminal in the league of gangsters like Dawood Ibrahim and Chhota Shakeel and had planned to kill BJP leader L K Advani, Chief Minister Narendra Modi and VHP leader Pravin Togadia.
However, Sadiq's brother, Shabbir, in a petition in HC, had alleged he was killed in a fake encounter by Gujarat Police as part of a 'conspiracy' hatched by Vanzara and others.