After an image of a Newtown-based police officer temporarily appeared on a gay dating website under the prank profile of "Captain Moonlight", Aaron Manahan found himself charged with using a carriage service to menace, harass and offend.

But when Sydney Local Court heard of the manner in which police had gathered alleged "admissions", including an acknowledgement from a detective senior constable that he was "unaware" of his professional obligations under the Commonwealth Crimes Act, magistrate Janet Wahlquist excluded all evidence as "inadmissable" and dismissed the case.

"'The law is there for a reason. It has to be complied with," she said, adding: "There are special circumstances. But police not knowing the law is not a special circumstance."

The damning case against NSW Police follows a recent Fairfax Media expose that revealed how the force had illegally monitored a Sydney man's private Facebook page for four months to obtain evidence that led to him being charged with six offences relating to "offensive posts" on a closed account.

Mr Manahan, 27, alleges that during their vigorous pursual of him, police acted like "thugs" and threatened to bring the "riot squad" to his home, a claim the force has denied.

"I was the one menaced and harassed," he alleged, adding: "This is the heavy-handed, nanny state Sydney has become."

The story began last May when Mr Manahan, who by night is "Aaron Manhattan", was suddenly "caught short" while walking home following a show at Erskineville's iconic Imperial Hotel.

"It was 6.30am on a Sunday morning, nature suddenly called, so I ducked behind a tree," he said. But just as the fully frocked entertainer was about to spring a leak, he was sprung by a police officer who issued him with a $500 fine for "offensive conduct".

For about 18 hours, a photograph of the same uniformed officer later appeared on the gay dating site "Scruff", attached to a fake profile that read: "Captain Moonlight. Stunning redhead with Tazer."

One week after the post had been deleted, Mr Manahan received a house call from Newtown-based detective senior constable, Dane Healey, who, along with a colleague, accused the performer of having taken the image.

In his statement tendered to court as evidence, Constable Healey said Mr Manahan "produced his phone" and agreed to police scrolling through its deleted folder – where the relevant image was located. He said that Mr Manahan then accepted full responsibility for the fake post, stating: "He [the officer] took a photo of me – so I took a photo of him. I was just drunk, it was stupid, I didn't mean any harm."

However, when Constable Healey attempted to get Mr Manahan to sign jotted notations in his police notebook as a "true and accurate" version of what had been said between them, he refused, replying: "Look, I'd rather not. I've been up all night and need to sleep."

The court heard that Constable Healey then returned to Newtown station where, after lengthy discussions with "many" colleagues, a decision was made to press criminal charges, upon which he returned to Mr Manahan's home and offered him the "opportunity" to participate in a recorded interview.

Mr Manahan, who never got to give his evidence in court, claims that when that "offer" was declined, "things suddenly escalated".

"I had two cops at my door, four days running," he told Fairfax Media, adding: "They became really angry. Then they demanded my phone. When I said no, they threatened to break the door down and bring in the riot squad. I was terrified ... so I gave them the phone."

When the matter came before Sydney Downing Centre a fortnight ago, NSW Police presented their case without an independently verified admission from the accused.

In an unexpected twist, Constable Healey told magistrate Wahlquist he did not realise he had to comply with various tape-recording requirements, surrounding confessions, that fall under section 23V of the Commonwealth Crimes Act.

"If you were considering that possibly, you were going to charge him with this particular offence, did you turn your mind to the fact that you should record admissions?" he was asked.

"No I didn't," replied Constable Healey, adding: "I did not know the rules of evidence in relation to the criminal code at that stage. I believed at the time I was following the rules of the [NSW] Evidence Act ... I wasn't aware there were other rules for the criminal code."

Magistrate Wahlquist said that while the police actions were not "malicious", both officers had displayed a "lack of knowledge" of the law, pointing out that both were carrying iPhones, on which they could have recorded events, but didn't.

"The fact that the police didn't know – they should have known," she said.

NSW Police said on Saturday they had "reviewed the matter" and are "satisfied" the investigation was carried out correctly "with the exception of the recording of the alleged confession".

It added: "While it is rare for an officer in this state to use that specific federal legislation, it is likely that having done so could well have led to a different outcome at court."

Mr Manahan's lawyer, Nicholas Stewart, said he was happy with the result but "concerned" by the "unnecessary prosecution".

Mr Manahan, meanwhile, said he still felt a sense of injustice. "I had to scrape together $5000 on a lawyer and barrister to defend myself. Trust me, that is a lot of drag shows."