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Authority to disqualify is in Section 113(1)(b) of the SS Contributions & Benefits Act, referring to people undergoing imprisonment or detention in legal custody; but 113(1) does start off with: "Except where regulations otherwise provide ..."
The pertinent regulation is reg 2 of the SS (General Benefit) Regulations 1982 - exceptions from disqualification for imprisonment, etc. Reg 2(2) says there's no disqualification for pretty much all the non-means tested benefits (including, of course, DLA) for any period of imprisonment or detention concerning criminal proceedings, unless a (custodial) penalty is imposed at their conclusion. Also, if you're in custody outside GB but would have fallen within reg 2(2) if in GB, you're also OK - reg 2(9).
So, people found not guilty aren't disqualified. Reg 3(1)(a) goes on to confirm that suspension (ie not disqualification) applies during custody; and 3(4)says that the suspension period doesn't count when considering Claims & Payments Reg 22, which might otherwise extinguish entitlement because of failure to obtain benefit within the prescribed time.
My guess is that the DLA lot are confusing this case with that of a person detained for a civil offence; in such a case, even if the law imposes a custodial penalty, benefit isn't disqualified,in contrast with a criminal case. CD R(S) 8/79 confirmed this.
Refer them to DMG para 12060 et seq, which deal with this accurately.
Jim
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