Justice K M Thaker asked the central agency to file its reply on the bail plea before November 11, when the next hearing has been scheduled.
On August 16, Special CBI Judge R M Parmar had rejected Chudasama's bail plea, observing the officer was accused in a heinous crime and described as the key conspirator by the prosecuting agency (CBI).
The court had further said if let off on bail, there was possibility that the accused could tamper with evidence and influence witnesses.
Chudasama had challenged the lower court's order in the HC, where he claimed he was being used as a tool by the CBI to get to former Gujarat Minister of State for Home Amit Shah, another key accused in the case who is now out on bail.
In the plea, the police officer, who was DCP (Crime Branch) in Ahmedabad when arrested by CBI in April last year, has contended that he was innocent and wrongly implicated in the fake encounter case.
In November 2005, Sheikh, an alleged gangster, was killed in a fake police encounter on the outskirts of the city. His wife Kausar Bi was also killed a few days later.
Tulsi Prajapati, a close aide of Sheikh, who was a witness to the killing, was also shot dead in a fake police encounter in December 2006.
The Supreme Court has asked the CBI to investigate the killing of all three.