Yes, he was PIC and made a mistake of not preventing the outcomes and is at fault.
Actually he was hung on what was a deliberate/intentional action. The instructor chose to slide in rudder when the aircraft tracked left of center. That is not a mistaken action, it was deliberate, and was intended to assist the student. The reason the case went against the instructor is that action is considered contrary to all available information provided from the RAA, and other credible inputs. The industry consensus is that it should be clear who is acting on the controls at any time, this was written in RAA manuals and is widely accepted across aviation as critical to safety. As a professional instructor, especially one conducting an assessment, it should be clear that the student will be acting on the controls until such time the instructor takes over. The judge, and many others, considered that the input of rudder by the instructor directly led to the sequence of events that led to the crash, that is had it not occurred the crash would not have happened. BTW, I'm not saying the instructor deliberately caused the crash, just that the action itself was deliberate, but the consequence was unintended.
The correct method should have been a verbal reminder first. That is, "xxx you are tracking left of center line", then if not corrected (but still safely in margins); "XXX you need to regain centerline tracking", if it appears it's going to get dangerous "Taking over" and physically take full control, either reject the take-off or continue if safe. From an assessment point of view, statement one, slight mark down, debrief that you had to prompt, statement two, mark further down, debrief I had to prompt twice, the situation was approaching unsafe, but corrected. Last action, failed task, I had to take over, the situation was unsafe if continued. This is also a valuable training tool, the student knows exactly where the issue occurred and either corrected or didn't, being shown what is acceptable and what is not. Pushing in controls here and there that the student most likely would not even notice is unsafe and may actually make them believe they are doing it all themselves.
So we are not talking about an accident where a basic error lead to the outcome, we are talking about an intentional action that goes against what an instructor should do. Whenever you chose to do something against company procedure, the rules or general accepted method (if it's considered safety critical) then you open yourself up to litigation. As an instructor, you must be up to date not only with rules and procedures, but also accepted method and technique.