Haven't read all replies but my thoughts are:
To say that to his elder and a relative was impertinent.
The phrase IS outdated and a bit irrelevant here; he was speaking and she was being discourteous by interrupting - 'How dare you speak to me like that!' would have been more appropriate.
In my opinion children should show respect to their elders at all times and their responsible adults should fight their battles.
I think children have it tough really, because they deserve equal respect from adults, and yet I find a child speaking as an equal to (well you know; without due reverence - it's a fine line), or remonstrating with, an adult bratty behaviour. Obviously you need to teach children how to protect themselves and never lead them to believe that their rights are less important than adults, you just need to say that the best adults will treat them with respect but that if some don't (like your MIL) it's still inappropriate for the child to deliver the dressing down and they should take their complaints to their parents or teacher etc.
Sorry I wrote most of this last night and didn't finish so it's probably moved on now. FWIW, her behaviour would have pissed me off mightily, but I would still have had a word if it had been my DS.