Sounds to me like your group should have got together and hammered out a common understanding of alignment before you got to that point, especially when dealing with characters with alignment issue. It also sounds to me like your DM didn't really understand alignment all that well, or was just being awkward.
I see these sort of suggestions a lot and they always seem to miss the point. Most of these arguments happen because they group thought they had a shared understanding of the alignment system (or any other area of the rules). Finding out in the middle of a session partway into the game is where the conflict comes in.
And again - it comes down so much to personal interpretation. You blame the fault in that scenario on the DM "not understanding alignment" - because he interprets it differently than you, not because he is actually contradicting the rules. Because the rules just don't offer enough guidance or detail to ensure common ground between both of you.
You do have a point that, once the game starts, when it comes down to conflicting interpretations, the DM usually takes precedence. The problem is that most rules calls don't involve telling you how to play your character.
Say I'm playing Byron the Berserker - I'm a smart, professional, friendly warrior with a good head for tactics - when I don't fly into a killing rage and render everything on the battlefield into bloody bits of flesh and bone.
Seems like a classic Barbarian - but the second the DM says, "No, in order to stay a barbarian, you must at all times be breaking the law and causing mayhem"... that kills the core of the character. In a way that other rules calls don't.
But the alignment system puts that power into the hands of the DM. And, in my opinion, that is a fundamentally bad thing.
Now, many would argue that it is helpful, since it lets the DM keep some characters in check. It gives them a way to respond when the so-called 'good cleric' murders some vagrants in the street, or the paladin starts torturing and maiming folks he believes are evil.
But problem players will often find ways around them, or find ways to justify their actions. The proper way to respond to that is with in game consequences. Let the character choose how they want to play, and deal with it.
One can argue that is what the DM is doing with the Barbarian who loses his powers by being too lawful. But that is only a consequence because that is a system with alignment mechanically attached to the class. Remove that, and the DM would never have cause to say such a thing - it is basically a nonsensical consequence with that element removed.
It is easy to blame the DM for making a bad call. But I think it important to recognize that the system gave him the tools to make that bad call, and steered him in that direction. Calling it blameless seems to be missing the underlying problem itself.