Justice Kailash Gambhir and Justice Indermeet Kaur said: "The evidence produced by the prosecution and even the medical evidence does not lead us to believe that the appellant had committed a rape of his daughter."
The bench set aside the trial court's order that sentenced the man to life imprisonment on the charge of rape of his minor daughter in 2006.
"It is unfortunate, that to seek revenge from her own husband, she went to the extent of using her minor daughter as a tool to implicate him of an offence such as rape," the court said.
"The facts and circumstance of the case make it amply clear that the grudge nursed by the mother of not being adequately compensated during the divorce coupled with the fact that she was made to agree to hand over the legal custody of children in favour of her husband and above all the remarriage of the husband capitulated her into plotting this devious act."
The bench also rejected the claim of prosecution that man raped his daughter, saying: "The common belief that no women will fabricate an offence such as rape owing to its social and mental ramification is undoubtedly flawed as is exemplified by the present case..."
"The trauma of a man being falsely accused of raping his own flesh and blood is unspeakable and unfathomable.
"The court is appalled as how the mother for her personal vendetta compromise the well-being of her daughter to let her live for a lifetime with such a stigma and scar of being raped by her own father. The question is best left unanswered in the interest of humanity...," the court said.