In 1934, the graves of two companions Hudhaifa al-Yamani and Jabir b. Abdullah al-Ansari were dug in Iraq and were transfered to another place. I have read a long story about them coming in the king's dream and that their face was perfectly ok when they took them out after 1300 years!
Is it true? Even if its true, is it permissible to dig the graves for this purpose?.
I do not know whether this story is true or not.
With regard to the second part of the question, is it permissible to excavate graves?
We say that the basic principle is that it is not permissible, because of the hadeeth of ‘Aa’ishah who said that the Prophet (peace and blessings of Allaah be upon him) said: “Breaking the bone of a dead person is like breaking his bone when he is alive.” (Narrated by Abu Dawood, 3207). This indicates that the dead person has a kind of sanctity, and the Muslim has sanctity whether he is alive or dead. If that is the case, then it is not permissible (to excavate graves) unless that is for an obvious reason. Issues of this kind should be referred to a shar’i judge who can decide whether there is such any interest to be served by doing this.