The FIR was registered in February last year by then Vigilance head Jacob Thomas, against the Congress leader, then chief secretary EK Bharath Bhushan and three others. The accused subsequently approached the high court to quash the FIR.
The high court on Friday came down heavily against the vigilance bureau, and Mr Thomas for registering a case on a non-existent land grab.
The issue was taken up by media in 2015 on reports that Mr Chandy, as chief minister, asked the chief secretary to look up the issue of a private builder getting access to land belonging to state-owned Kerala Water Authority at Pattoor in the heart of Thiruvananthapuram, where they were building an apartment and business complex.
Later, the then opposition led by VS Achuthanandan went hammer and tongs against Mr Chandy for giving government land to a private builder and made it a major issue in the 2016 assembly election campaign.
After the Pinarayi Vijayan-led government assumed office in May 2016, Mr Thomas, appointed vigilance chief on the day Mr Vijayan assumed office, led the investigation and in February last year registered a case against Mr Chandy and others for misuse of authority to favour a private builder.
"No one knows the pains I had to undergo as it was at the fag end of an impeccable professional career of 36 years, this case first surfaced and then after retirement, I was arraigned as an accused as I became a victim of political battle," he said.
It remains to be seen if the state government will go in appeal against this verdict.
State law minister AK Balan said that he too has heard about the court ruling and will now have to study it in detail before deciding on the future course of action.
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