However, Gujarat government said that the charge sheet in the case has already been filed and the offence is made out.
"The offence is made out," senior advocate Ravi Shankar Prasad told a bench comprising justices Aftab Alam and Ranjana Prakash Desai.
Prasad gave the response when the bench said, "you must have read the FIR in the case and the FIR itself was a violation of human rights."
"We are thoroughly dissatisfied in the manner the FIR was lodged and the allegations contained in the FIR. The FIR is in violation of human rights," the bench observed.
The bench was hearing a petition by Setalvad against the May 27 last year order of the Gujarat High Court, which had refused to quash the FIR registered against her at a police station in Panchmahal district of the state on exhumation of the bodies from a graveyard near River Panam.
Gujarat government submitted that initially Setalvad was not an accused in the case but during the investigation, her alleged role was found and there are independent witnesses to support the allegations against her.
The court agreed to hear the case but said, "it is a malafide case."
"Today we ask you (state) to stop further investigation in the case," the bench said.
At this point, Prasad said that the charge sheet has been filed in the case and investigation was carried when she was not an accused.
However, the bench said, "Whatever position stands today shall remain" and posted the matter for July 18.
Prasad also told the bench that in the Gujarat High Court there was no plea for quashing the case against Setalvad.
During the last hearing, the bench had said that it was a "spurious" case to victimise Setalvad and this type of case does no credit to the Gujarat state in any way.
Besides this case, the Gujarat government has also lodged criminal proceedings against her in other riot-related cases.
Earlier, the bench had said that it was not correct on the part of the Gujarat government to go ahead with the case.
The state, in its affidavit, had said its probe against Setalvad in the case had showed that she actually planned and executed the digging of the graves without any permission in 2006.
The state had claimed that during the probe into the case, it has emerged that "Teesta Setalvad, the petitioner herein, was the main accused, who actually planned and executed this operation of digging of graves near Pandarwada through her staff."
The government had said the other accused have claimed innocence and had blamed Setalvad for instigating them to carry out the exhumation, which is a penal offence.
It was alleged that in 2002, about 28 unidentified bodies of the riot victims from Pandarwada and surrounding villages in Khanpur taluka were buried in the graveyard.
The high court had declined to scrap the FIR, but had quashed the summons, which had said she is absconding.
In its May 27, 2011 order, the high court had observed that by showing Setalvad as an absconding accused in the charge sheet filed in April, "a glaring mistake has been committed by the investigating officer".
The FIR had alleged that Setalvad, who had earlier secured anticipatory bail from a local court in Panchmahal district, was the prime conspirator behind the incident.
The state government, in its affidavit, had named five accused Rais Khan Pathan, Gulam Kharadi, Sikander Abbas, Qutub Shah Diwan, Jabir Mohammed who in their respective statement blamed Setalvad for instigating them.