The BBC quoted High Court Judge J.D. Kapoor as saying there was no evidence of involvement in the deal by Gandhi or the late former defense secretary S.K. Bhatnagar.
"Sixteen long years of investigation by the (Central Bureau of Investigation) could not unearth evidence against them for accepting bribes," said Kapoor.
Gandhi's widow, Sonia, now the leader of the main opposition party in Congress,said she was delighted with the verdict: "My husband always said that one day his innocence would be proved. I hope the people who caused him so much pain will now rethink the falsehoods they spread about him."
The scandal was a key issue in Rajiv Gandhi's 1989 election defeat. He was assassinated while campaigning in 1991.
Notable deaths of 2014 [PHOTOS]