A delighted Sanal Kumar Sasisdharan, the director of the film, said the court's ruling was a victory of "cinema and democracy".
The decision was also welcomed by several jury members of the Indian Panorama section as well as sections of the Kerala film industry.
Allowing Sanal's petition, Justice B Vinod Chandran directed the ministry to screen the film at the 48th edition of the International Film Festival of India (IFFI), which began in Goa yesterday.
"S Durga", which was earlier titled "Sexy Durga", narrates the horrifying experience of a hitchhiking couple.
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The director moved the court after the film was dropped from the Indian Panorama section of the festival along with the Marathi film "Nude". He contended that the ministry's decision to overrule the recommendation of the 13-member jury and pull out the two films was unconstitutional.
Sanal told PTI over the phone from Australia that the decision had reinstated his trust in the judiciary.
"I am very happy. It is a victory of cinema and democracy. People stood by us and believed in us and it has paid off. The chairman resigned, other jury members also resigned," he said.
"This is a victory for all of us. It is proof that democracy can't be killed and law is for the people," Sanal said.
He said in a tweet later that he was a "poor, helpless, powerless citizen of India" and believed that the "India(n) government" would safeguard his rights as a citizen.
"That is why I am here, as a citizen blindly believing that you will safeguard me. Please don't abandon me... I am nothing but mind you... You are not everything!"
Asrani said the Kerala court ruling was a "huge victory" for the director and restored his faith in democracy.
"Fantastic! The court has directed IFFI to screen #SexyDurga on the day #IndianPanorama is inaugurated," he wrote on Twitter.
Jury member Ruchi Narain also expressed her happiness and said the judiciary "metes out" justice.
"The IFFI festival audience will get to see an amazing set of films," Narain told PTI in Panaji.
Director Rahul Rawail, who replaced Ghosh as chairman of the the Indian Panorama jury, however, refrained from commenting on the development.
Nishikant Kamat, another jury member, said everyone should respect the decision of the judiciary.
There was, he added, obvious disappointment when the jury's well considered decision to include the film in the Panorama section was not considered.
Six jury members, including Narain, had written to Information and Broadcasting Minister Smriti Irani on Sunday to express their concern.
The court decision was welcomed by several members of the Kerala film industry.
Filmmaker V K Prakash added that the verdict is a solace to independent filmmakers like Sanal.
"The I and B ministry's decision to drop 'S Durga' from IFFI is nothing but the intervention of the government machinery in artistic freedom. It should not have happened. Especially as the movie was selected by an expert panel," he told PTI.