A bench of Acting Chief Justice Gita Mittal and Justice C Hari Shankar directed the police to maintain "strict status quo" in the colony and told the local residents not to carry out any permanent construction.
Spread over an area of around 14 acres, Kathputli Colony was home to a large number of puppeteers, magicians, singers and musicians.
The bench said the persons who were ineligible for relocation as per the Delhi Development Authority (DDA) and whose houses were demolished in the drive, should not be removed from the area so that they can prove their eligibility for relocation and rehabilitation.
The court told the authorities that while relocation may have to be done, "it needs to be dignified".
To the residents of the colony, the court asked why do people come to the heart of Delhi and seek in-situ (at the same spot) development and why couldn't they settle in the outskirts.
In the petition filed through advocate Kamlesh Kumar Mishra, the residents and the NGO, National Alliance of People's Movement, have claimed that the DDA issued a notice on October 25 for vacating the area giving them only four days to move out.
The court said the authorities first allow people to encroach and then do not give them sufficient time to appeal against the demolition action, especially when an appellate authority is provided for under the law.
During the arguments, Additional Solicitor General Sanjay Jain, appearing for DDA, said several thousand families shifted to transit camps in 2014 and an additional 800 families moved there in June this year.
He alleged when the demolition was initiated yesterday, there was stone-pelting by the residents leading to injuries to the police personnel who were assisting in the drive.
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