A bench of Justices B R Gavai and Sarang Kotwal took into consideration the man's acquittal in another case in which he was charged with murder in 2001, after he pleaded that he was suffering from paranoid schizophrenia.
The court rejected the prosecution's argument that if the man was acquitted, he might commit a third murder.
The bench had last month acquitted the man, a resident of Mira Road in the neighbouring Thane district, while hearing a petition filed by him.
The man had challenged an order of the Thane sessions court sentencing him to life imprisonment in 2013.
While quashing and setting aside the sessions court's order, the high court said, "...the appellant was incapable of knowing the nature of the act by reason of unsoundness of his mind and thus, is entitled to benefit of section 84 (act of a person of unsound mind) of the Indian Penal Code".
According to the prosecution, the man assaulted his building's watchman on November 8, 2007 with a knife because the latter did not follow his order of watering some plants at his residence.
The guard was rushed to a hospital by other residents, but he was declared dead.
An offence under section 302 (murder) of the IPC was subsequently registered at the Mira Road police station against the man.
The trial court should not have convicted him as he was entitled to benefit under IPC section 84 (act of a person of unsound mind), he said.
The assistant public prosecutor opposed the argument and informed the court that the man had in the past killed another person.
In that case, the trial court had acquitted him in September 2001, invoking provisions of IPC section 84.
The bench led by Justice Gavai quashed the sessions court order calling it "totally erroneous".
The high court held that the accused had sufficient evidence of suffering from schizophrenia prior to occurrence of the incident and also after it.
"It could be seen that even if a reasonable doubt is created in the mind of the court with regard to mental condition of the accused at the time of occurrence, a benefit has to be given to the accused," the court said.
"We are of the considered view that the sessions court order is totally erroneous. In the present case, the appellant/ accused is entitled to the benefit of section 84 of IPC and thus, he will have to be acquitted," the bench said.
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