Admonishing the Gujarat government for its position on an issue that caused friction with governor Kamla Beniwal, the high court on Wednesday upheld her appointment of a retired judge as lokayukta.
The Narendra Modi government has decided to challenge the verdict in the Supreme Court.
"The chief minister's (Narendra Modi's) challenging actions show a false sense of invincibility," justice VM Sahay said.
Gujarat government spokesperson Jaynarayan Vyas said the verdict would create a "constitutional crisis" because the governor had allegedly bypassed the state government in this.
In August, the governor had appointed justice (retired) RA Mehta, a retired judge of the Gujarat high court, lokayukta without waiting for a recommendation from the state government.
In October last year, a division bench had given a split verdict, which was subsequently referred to justice Sahai for adjudication. With Wednesday's verdict, the governor's position has thus been upheld by a 2:1 bench.
In the October judgment, justice Akil Kureshi had upheld the appointment while justice Sonia Gokani had set it aside on the grounds that it was "unconstitutional" because the governor could act only on the advice of the council of ministers.
The governor had made the appointment after chief justice SJ Mukhopadhya (now in the Supreme Court) had recommended justice Mehta's name.
However, chief minister Narendra Modi had expressed reservations about justice Mehta and written to the chief justice, recommending justice (retired) JR Vora for the post. But the chief justice differed with him.
Gujarat Congress leader Shaktisinh Gohil, who is also leader of the opposition in the assembly, was critical of Modi.
"The Gujarat chief minister has favoured his pet industrialists, so would not want any watchdog to examine and investigate his decisions," Gohil said.