The case was filed against the actor in 1998 when he was the honorary chairman of an export firm.
The firm reportedly could not pay its dues to an investor and its cheque bounced, which is illegal in India.
The court said that the actor was not involved in the daily management of the firm and hence he could not be held responsible for payment defaults.
Earlier, the actor was exempted from appearing in court due to his poor health.
Described by critics as the ultimate method actor in India, Kumar has won more awards than any other Bollywood star.
Over his long career, he won eight Filmfare awards, India's version of the Oscars.
Kumar has also served as a member of India's upper house of parliament.
Born Muhammad Yusuf Khan in 1922 in Peshawar, now in Pakistan, the actor changed his name to Dilip Kumar when he joined Bollywood.
The historical 1960 drama Mughal-e-Azam, in which he played the role of Prince Salim, is one of the biggest hits of Indian cinema.
He also acted in superhits like Ganga Jumna, Devdas, Andaz and Aan.
Seen as a legend of Indian cinema, Kumar passed over a lead role in David Lean's Lawrence of Arabia.
The part of Sherif Ali went to Egyptian actor Omar Sharif, who was nominated for an Oscar for the 1962 epic.
A Mumbai court has cleared veteran Bollywood actor Dilip Kumar, 94, in the 18-year-old case of a bounced cheque.