"Using horse-driven carriages only for joyrides solely for human pleasure is an avoidable activity," the order said.
The court agreed with animal rights groups that the practice was cruel.
Reports say that around 700 families depend on Victoria carriages for their livelihood.
Monday's court order came on a petition filed by animals rights groups which said the horses were often malnourished, denied adequate rest and care.
The Bombay high court in the city of Mumbai ordered that all stables where these horses are kept must be closed down and  directed the authorities to come up with a scheme to rehabilitate those involved in the trade.
Styled on open carriages used during Queen Victoria's times, these horse-drawn carriages have been seen on Mumbai's streets since British times and a ride on them has been one of Mumbai's most-popular tourist attractions for decades.
The drivers of these carriages say that "Victorias are a key part of Mumbai's cultural image" and some of them say they are sceptical about the government's rehabilitation plans.
Usmaan, who is 60, has been working with a horse-drawn carriage since he was 12, says it is going to be difficult for him to adapt to a new job and that he feels like his "hands have been cut off".
The court has also ordered that all horses should be rehabilitated at a care centre.
"The government shall also formulate a rehabilitation scheme for the horses. If any reputed animal welfare organisation comes forward to take care of these horses, then the state government is free to consider the same" the Hindustan Times quotes the court as saying.
A court in India has ruled that Mumbai's famous horse-drawn carriages, popularly known as "Victorias", are "illegal" and must go off the city streets in a year.