Police said the Sub Inspector Kalidoss had taken Syed Mohammed to the police station and was questioning him about the complaint when he pulled a knife and stabbed him.
"The SI opened two rounds of fire in self defence at the point blank range, killing Mohammed on the spot", police said.
Mohammed, who was in an inebriated condition, had caused panic in the S A Pattinam market area demanding money from the traders and passers with a knife in his hand.
He was taken to to the station following complaints from people in the area, police said.
Kalidoss was admitted to hospital with stab injuries, police said.