The Mumbai branch of the agency filed a closure report before a special CBI court saying it could not find evidence which indicates criminality of Lt Gen (retd) Nobel Thamburaj.
The agency had based its probe on a complaint from the Defence ministry which had alleged that defence land in the Pune cantonment was given to a private builder in violation of the norms.
It was alleged that Thamburaj and Defence Estate Officer S R Nayyar had favoured the builder.
CBI sources said action was recommended against the accused as due process was not followed in allotment of land to the builder but there was no criminality the case.
Sources said the agency could not find evidence of any quid pro quo which could have benefited Thamburaj or Nayyar.
According to the CBI FIR, Thamburaj, who retired as vice chief in October 2009, and Nayyar had allegedly shown undue favour to the builder for a property measuring 0.96 acres in Defence Land at Pune Cantonment.
"There was a dispute going on regarding the property in question. Thamburaj and Nayyar settled the matter out of court in spite of several court orders given in favour of the Army. The duo indulged in gross misconduct," CBI had alleged.
The two officers ignored rules and policies, violated the terms of lease entered into by the ministry of defence and Kalpataru and caused the private company pecuniary gains of about Rs 46 crore, it claimed.