Well this is embarrassing. Issue wasn't the ajax or web2py, it was a typo 
in controller.

For future reference,
The reason why web2py error came up as above (None post vars) was that I 
was double clicking on the failed network request in the chrome devtool and 
it was opening controller/upload_file, which obviously will not get any 
vars.

Everything's good now.

-- 
Resources:
- http://web2py.com
- http://web2py.com/book (Documentation)
- http://github.com/web2py/web2py (Source code)
- https://code.google.com/p/web2py/issues/list (Report Issues)
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