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Tata Motors had planned to build a plant at Singur, where it wanted to make Nano - the world's cheapest car.
However, following large-scale violent protests from local farmers against the plant, Tata Motors scrapped this project in 2008 and later moved it to Gujarat.
Early this year, the West Bengal government enacted the "Singur Land Rehabilitation and Development Act, 2011," to return the acquired land to the original land owners.
Tata Motors opposed this act and had moved the Calcutta High Court challenging the constitutional merits of the act as well as the land rehabilitation and development rules framed under the act.
The company will study the judgement and decide its next course of action, Tata Motors said in a statement.
Land acquisition has long been a politically charged issue in India, where hundreds of millions of poor farmers are a vital voter base for political parties.
Protests by villagers have already stalled major projects such as a steel mill by South Korean firm POSCO and halted the development of key highways.
The court dismissed the petitions filed by Tata Motors and ruled that any action taken under the act was also constitutional.
Tata Motors can claim compensation at a lower court which has to decide within six months, the judgement said. Incase, the state government admits the compensation claim, it has to immediately pay as it has taken possession of the land, it said.
The court has directed the government to compensate Tata Motors as per the provisions of the Land Acquisition Act, 1894, and has asked the state machinery to ensure a smooth transfer of the land back to farmers.
Tata Motors can challenge this decision and order in appeal, the judgement said.
Shares of Tata Motors, valued at $9.38 billion by the market, closed up 0.2 percent at 156.05 rupees on Wednesday, in a weak Mumbai market.
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