The court directed the Yogi Adityanath-led government to pay compensation to Wani in terms of the average income in accordance with his educational qualification for the time he spent in jail, saying he was a victim of "negligence" of officials in probing the case.
Wani was pursuing PhD in Arabic from Aligarh Muslim University when he was arrested from Delhi on July 30, 2001.
It said the officials had not obtained sanction to prosecute the accused and a charge sheet was filed in dereliction of their duty, violating Wani's physical independence and also harming him physically and mentally.
The court's findings came as it acquitted Wani and Mohd Abdul Mobeen of the charge of having allegedly orchestrated the Sabarmati Express blast in 2000 that had claimed nine lives and left several others injured.
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It said the police had not produced any evidence to prove that the two had conspired with others to cause a bomb blast in the train and wage a war against the country.
It said if the government failed to pay the compensation, Wani would be at liberty to approach the Allahabad High Court.
A total of 11 cases were lodged against Wani, of which he has been exonerated in 10 -- either acquitted or discharged.
The Supreme Court had granted bail to Wani in April this year, observing that he has suffered incarceration for over 16 years and has been acquitted in nine out of 11 cases.
In one case, Wani was convicted and sentenced to 10 years in jail for carrying explosives to trigger a blast in Delhi. However, the Delhi High Court had suspended this sentence.
His counsel M S Khan said "an intellectual person's life has been spoilt. There is an irreparable damage to his career. He was such an educated person and would have excelled in his life. The erring police officials should be punished and they must be taught a tough a lesson."
The judge said it was the duty of senior police officers to check the charge sheet, remove the defects and file it in the court, but they showed negligence in their duty which also harmed the government.
The court directed the government to take appropriate action against the erring police officials and said that a copy of the judgement be sent to the district magistrate, Barabanki, and the Home Secretary of the state government.
The blast was carried out on the eve of Independence Day near Kanpur when the train was on its way from Muzaffarpur to Ahmedabad, claiming nine lives and several others injured.
The prosecution had alleged that the accused had hatched a conspiracy in May 2000 at the Habib Hall of the Aligarh Muslim University to carry out a blast in the Sabarmati Express on August 14, 2000. Charges were framed against him in July 2001.