Justice Vibhu Bakhru remanded the matter back to LG Anil Baijal to pass a reasoned order within eight weeks after hearing the political party.
The court said the April 12 order cancelling the allotment did not say which law or rule has been violated.
It told the central government that if there is a policy for alloting accommodation to political parties, it has to be applied uniformly.
According to AAP, represented by senior advocate Arun Kathpalia, the party was allotted bungalow number 206 at the Rouse Avenue here on December 31, 2015.
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Thereafter, on April 12 this year, AAP received a communication informing it that the LG has cancelled the allotment of the bungalow on the ground that it was contrary to law and the rules, the petition filed through advocate Aaditya Vijaykumar, said.
The party had contended that as per the central government's policy, all registered political parties are entitled for an accommodation.
During the arguments, Additional Solicitor General Sanjay Jain and the central government standing counsel said an accommodation was offered to the party in Saket in South Delhi, but AAP had refused to accept it.