Defense attorney Vrinda Grover said the Supreme Court also directed the Indian government to make public all orders imposing a lockdown in Kashmir in August after the constitution's Article 370 granting Kashmir special status was revoked.
The court held that the internet shutdown impacted the freedom of press which is part of freedom of speech and expression.
Prime Minister Narendra Modi's government ended Muslim-majority Kashmir's semi-autonomous status in August. The move was accompanied by a harsh crackdown, with New Delhi sending tens of thousands of additional troops to the already heavily militarized region, imposing a sweeping curfew, arresting thousands and cutting virtually all communications.
Authorities have since eased several restrictions, lifting roadblocks and restoring landlines and cellphone services. The internet is yet to be restored in the Kashmir valley.
They have encouraged students to return to school and businesses to reopen, but top political leaders from the region continue to be under arrest or detention.
Ghulam Nabi Azad, an opposition Congress party leader, and Anuradha Bhasin, editor of The Kashmir Times, were the main petitioners in the court case.
Bhasin said the restrictions had crippled the freedom of the press, essential services and even communications between families, bringing untold miseries to people.
Solicitor-General Tushar Mehta, who argued the government's case, said authorities acted based on evidence from intelligence and the military, inflammatory material and speeches, and faked stories, photos and videos that were spread on social media.
Mehta had argued in the court that "modern terrorism relies heavily on the Internet" and considers social media as its most effective weapon.