The court asked the Election Commission to hear the case afresh because the MLAs were not given proper hearing before the poll panel decided on their disqualification. The case was now referred back to the Election Commission for reconsideration.
It said there was a "violation of natural justice and no oral hearing was given to the AAP MLAs before disqualifying them as legislators"
The MLAs were disqualified for holding office-of-profit when they were appointed Parliamentary Secretaries.
Welcoming the verdict, AAP MLA Alka Lamba said, "It is victory of truth and we will be part of Budget Session in Delhi Assembly. Nobody wanted fresh elections and those who wanted polls started fearing its outcome."
Commenting on the order, Delhi Congress chief Ajay Maken said the high court has not denied that that the AAP MLAs have enjoyed perks.
The MLAs were disqualified on charges of holding offices-of-profit because they were appointed Parliamentary Secretaries in March 2015.
The Delhi government appointed 21 AAP MLAs as Parliamentary Secretaries to assist cabinet ministers and include more MLAs in governance work.
The post comes with perks similar to that of a minister. The law bars elected representatives from holding offices-of-profit during their tenure.
Lawyer and petitioner in the case Prashant Patel was the first to complain to then President Pranab Mukherjee that the MLAs holding the offices of Parliamentary Secretaries was in violation of the Constitution. Mukherjee referred the complaint to the Election Commission.
In his first reaction after the High Court verdict, Patel said: "The court has said this case will be reopened. I had just raised a constitutional issue. There is no setback for me."
On January 19 , the poll panel recommended the disqualification of 20 AAP MLAs. Of the 21, Jarnail Singh had resigned from the assembly to contest the Punjab elections.
President Ram Nath Kovind, as he is bound by the law, accepted the poll panel recommendation on January 20.
The disqualified lawmakers moved the High Court last month contending that the poll panel notification was a "gross violation of natural justice because the Election Commission decided the matter in undue haste and without affording and giving any opportunity of fair hearing to the petitioners".
AAP spokesperson Saurabh Bharadwaj said the AAP MLAs did not take perks.
"When they didn't take office of profit, the question of profit does not arise. But this you can say only when you listen to the MLAs. You have taken the decision without listening to them.
"There is a principle of natural justice. The Election Commission did not give the MLAs any opportunity to have their say. Today, the court has said the MLAs should have been given the opportunty to explain their position."
He blamed the Central government for the disqualification, saying the poll panel was "acting on its whims and fancies".
"If small states are blackmailed, then the federal structure will be completely destroyed."