The OP says the punishment is because the kid lied to her about an incident at school. Really, your using this punishment a 7 year old for lying. How are u even surprised by this woman? Still, wonder what he did, can't really make a solid decision as to whether she was justified or not till we know what he did.
I mean, this is pretty extreme punishment for a 7 year old, but I have known some 7 year olds who have done some pretty nasty things that could possibly warrant this kind of punishment.
Summary: Seen a lot worse, and it won't hurt the kid. It's hot sauce and a cold shower, I've inflicted worse punishment on myself in the name of getting up and being alert in time for class. Yeah, it's extreme, and she almost certainly shouldn't have done it(anything's possible), but there are worse things in life than having your mouth washed out with hot sauce.