A bench of Chief Justice G Rohini and Justice Rajiv Sahai Endlaw said the permission for the project, which was granted by the gram panchayat of Sukhna catchment area village and endorsed by the Punjab government, is set aside.
It also set aside environmental clearances given by the authorities concerned for the project.
"The court has examined the area in question, as per the survey of India maps, which indeed falls in the catchment area of Sukhna lake and hence the housing project cannot be allowed," the bench said.
The high court further directed the Punjab government to reconsider its decision given to the Tata.
It said, "If at all the Tata undertakes a fresh project, it should be a A-category project," the bench said in its over 160-page judgement.
The apex court had earlier stayed the ambitious housing project by reversing the go-ahead granted to it by the Punjab and Haryana High Court.
Later, the Supreme Court had transferred the plea to the Delhi High Court and asked it to decide the matter.
The project allegedly falls in the catchment area of Sukhna Lake in the Union Territory of Chandigarh.
The PIL was transferred to the Delhi High Court after it has been alleged that the beneficiaries include some of the judges of that high court and top bureaucrats of the state.
Besides seeking summoning of records related to the project, the plea had also sought issuance of a direction to restrain the respondents (Centre and others) from commencing the work "including construction, sale and allotment" of flats.
It had also alleged the project falls within the catchment area of Sukhna Lake and was in close proximity of wildlife sanctuary, declared a reserved forest area.
The PIL had said if the land and its surrounding areas are allowed to be urbanised, "it will result in the degradation of the habitat and disturb thousands of migratory birds which come every year to the lake".
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