A three-judge bench headed by Chief Justice Jawwad S. Khawaja passed the order on Tuesday.
The chief justice said the order must not be defied and should be implemented at all cost.
The shrine and temple were built at the spot where a Hindu holy man, Shri Paramhans, was buried in 1919. His followers visited the temple frequently till 1997 but some fanatics dismantled it.
The devotees tried to rebuild the temple but the land was allegedly under the occupation of a local mufti, Iftikharuddin.
Jadoon told the court that its earlier order on restoring the temple was carried out and a boundary wall built around it.
"We have also given a right of way to reach the Samadhi through the house of Maulvi Iftikharuddin who was earlier in possession of the temple," he said.
But the court declared that the efforts put in by the administration were not enough and proposed a new building instead of just erecting boundary walls.
The surrounding walls will spoil the area, said the chief justice.
He recalled how a temple in Shahalmi Market in Lahore was reconstructed by architect Kamil Khan, who had a clear understanding of architectural heritage and provided free consultancy to Hindus.
The court said the same architect's help could be taken to conserve this shrine too. The next hearing is scheduled for September 7.