The court also set aside a new constitution which had appointed Justice (retd) Justice Ali Shah as caretaker Chairman to hold elections of the board in 30 days time.
The SC issued a statement stating that the government notification had been declared null and void.
Sethi was removed from his post by the government through the notification yesterday and Justice Shah was appointed to hold fresh elections for the Chairman's position.
The SC statement said the new constitution drafted under Sethi was also illegal since his appointment was being challenged in court by Ashraf.
Since May, 2013, Zaka Ashraf and Najam Sethi have been in and out of the PCB Chairman's seat leading to a game of musical chairs in the board which eventually led to the Supreme Court admitting several petitions related to cricket affairs.
The two-member bench, including Justice Anwar Zaheer Jamali and Justice Mian Saquib, also declared the process to hold elections invalid.