"Most of our large teaching rooms are below the correct size for a full class and can take a maximum of 28 pupils."
It depends whether they are basing this on current building regulations (it would be interesting to know how many schools in the country meet these!) or on the net capacity assessment. If the latter, it's a fair point.
Is there any point in arguing this, or should we just go down the route of acknowledging their concerns
Most authorities are going to have enough of a case to win stage 1. In my view the best tactic is to come across as a very reasonable parent, not to be too argumentative, but just ask probing questions:
"Were all the extra children in the current year 7 admitted as a result of successful appeals?"
"Are you basing the 'correct room size' on current building regulations or the net capacity assessment?"
"What problems have you had with classes over 28?"
If the panel accepts the school has a case, then I agree it's best to acknowledge the school's concerns, and to focus on your case.