A bench headed by Justice P Sathasivam said the murders of both Prajapati and Soharabuddin were part of the same conspiracy and separate trial cannot be conducted in the two cases.
Shah, a close aide of Gujarat Chief Minister Narendra Modi, who is out on bail after spending three months in jail in the Soharabuddin case, was again facing the threat of being arrested by CBI in the Prajapati murder case in which the agency had filed a separate charge sheet against him.
The apex court's order came on the plea of Shah who has challenged the filing of separate charge sheet by the CBI in case of Prajapati's killing.
He had argued that the charge sheet filed in Prajapati murder case should be treated as second supplementary charge sheet in the Soharabuddin Sheikh's murder case.
The CBI, which has named Shah and 19 others in the charge sheet, has accused them of committing offences of murder, criminal conspiracy, destruction of evidence etc.
The special court, while accepting the charge sheet, had kept the issue of taking its cognisance pending.
Shah, who is the key accused in the killings of Soharabuddin and his wife Kauser Bi, has been named accused number one and the kingpin of the conspiracy in the fake encounter case of Prajapati, who was killed near Chhapri village near Danta in Palanpur on December 28, 2006.
The CBI has said Prajapati was a witness in the Soharabuddin case and his killing was part of a larger conspiracy in which Shah, as the then head of the state's police administration, was involved.
Soharabuddin and his wife Kauser Bi were allegedly abducted from Hyderabad by the Gujarat Anti-Terrorist Squad (ATS) and killed in a fake encounter near Gandhinagar in November 2005.
Prajapati, said to be Soharabuddin's accomplice, was also subsequently eliminated by ATS because he was an eye witness to the couple's killings, the CBI had said.
Shah was arrested by the CBI on July 25, 2010 and spent over three months in Sabarmati Jail in Ahmedabad in connection with the Soharabuddin case, the trial of which has been shifted to Mumbai court and the apex court had given liberty to the CBI to seek permission for transferring the Prajapati case also there.