It is disgraceful if this is left to each local authority, or actually allowing DLA/PIP to be classed as income in any form of calculation. I certainly know that as far as council tax liability is concerned our LA do not count this as income. I wonder how many actually do, or in the case of CT liability this is not allowed!
I also know it is difficult to find out these finer points of finance as each LA is concerned and it maybe worth a call to your local welfare rights officer to find out exactly your position.
Have you asked for this to be looked at again, Moody? Or planning to appeal this decision?