Scotland’s highest court has ruled that transgender women should be included in legislation aimed at improving gender balance on public boards.

The court of session found that Scottish government guidance that extends the definition of “woman” to transgender women with a gender recognition certificate (GRC) is lawful.

The ruling dismissed a second judicial review of the Gender Representation on Public Boards (Scotland) Act 2018 brought by the campaign group For Women Scotland.

The legislation has been the subject of a long-running court action by the group, which resulted in a ruling on appeal earlier this year that the legislation should not have included transgender women in its definition of “woman” as this “conflated” two distinct groups that are protected in law.

But Lady Haldane on Tuesday dismissed the latest challenge, accepting the argument brought by Scottish government ministers that it was clear the UK parliament had intended the 2004 Gender Recognition Act to enable a person to legally change their sex “for all purposes” and that person would then be entitled to the protection of sex under the Equality Act 2010, which the guidance refers to.

In her judgment, she stated that the meaning of “sex” for the purposes of the 2010 Act “is not limited to biological or birth sex, but includes those in possession of a GRC”. She added that this need not conflict with other legislation – for example another recent Holyrood law about sexual assault victims’ choice of medical examiner – where it is clear “sex” does mean biological sex.

She also stressed that sex and gender reassignment were “separate and distinct” protected characteristics under the Equality Act, but nor were they necessarily mutually exclusive.

Haldane insisted her ruling on a narrow point of law could not take in the “contentious social policy debate” ongoing in Scotland around transgender rights, with the Scottish government’s gender recognition reform bill due for its final reading at Holyrood next week.

The proposals to simplify how transgender people can change the sex on their birth certificate have encountered heavy criticism from the UK government, the EHRC and the UN.

Expressing their “huge disappointment” at the ruling, For Women Scotland said there were “clear ramifications” for the bill. “At first reading this seems disastrous for women who are seemingly now no longer recognised in law as a sex-class, with distinct requirements of our own … It is now beyond doubt that the bill is not a ‘simple administration change’ but does have a wider impact on society.”

But other equalities groups and the Equality and Human Rights Commission (EHRC) said the ruling confirmed the status quo.

Vic Valentine, the manager of Scottish Trans, said: “This ruling does not affect the exceptions in the Equality Act, which mean that single-sex services can exclude trans people or treat them less favourably where it is a proportionate means to a legitimate aim … They can do that whether or not the trans person has a GRC.”

A spokesperson for the EHRC, which was named as an interested party in the judicial review, said: “The law concerning matters of sex and gender can be complex, and clarity is essential for the public bodies, employers, service providers and people across the country who rely upon it.

“Today’s judgment supports our understanding that the effect of a gender recognition certificate is to change a person’s legal sex, including for the purposes of the Equality Act”.

A Scottish government spokesperson said: “We are pleased to note the outcome of this challenge.”