"There is not enough evidence against the senior IB officer," said a home ministry official, who did not want to be named. He said that passing on intelligence input could not be a basis of prosecution as the input did not talk of follow up action.
The official said sanction was required by the Central Bureau of Investigation (CBI) for any prosecution of the senior IB official.
There has been speculation that CBI would file a chargesheet next week in which Rajinder Kumar could be named for allegedly playing a role in generating the intelligence input that led to the alleged staged shootout.
Mumbai college girl Ishrat Jahan, Pranesh Gopinath Pilai, Amjad Ali and Jishan Johar were killed by Gujarat Police in a shootout in 2004 in Ahmedabad.
The CBI has questioned Rajinder Kumar, who was with the IB in Gujarat when the incident took place.
Home ministry sources said if CBI proceeds without taking sanction from the government, Rajinder Kumar was free to move the court challenging the chargesheet.
The Bharatiya Janata Party (BJP), which rules Gujarat, contends that the Ishrat Jahan shootout was not "fake" and was conducted on the basis of information received from IB. It has also raised questions over the manner in which the CBI was probing the case.