After my own frustrations with certain spin instructors at my gym, I tend more and more to treat their instructions as suggestions. If they don't make much sense or stand to injure some part of me, I freely ignore them. Like the instructor who wants our class to spin like crazy people while using a high resistance. Unless he's paying for my knee replacement surgery, I'm not doing it.
It seems like you've already gotten an answer to the no hands spinning question, but I'd further add that sitting up like really just works your quads. Strong quads are great, but if you want to be really powerful on the bike, you have to work your glutes and hamstrings. Your question brings to mind a passage in one of my favorite cycling/exercise books--"Bike for Life." In the book, it states that if your bike fits correctly, you should be able to practice "butt-centric" cycling. The ideal bike fit, according to the book, puts your upper body in approximately a forty-degree angle to your bars to best utilize your glutes and hamstrings. It makes sense to me, then, to approximate that angle in spin class so that I work those muscle groups. In fact, since I regularly started spinning, I do feel more powerful in that sense on the bike. I notice it during seated climbs in particular.
Live with intention. Walk to the edge. Listen hard. Practice wellness. Play with abandon. Laugh. Choose with no regret. Continue to learn. Appreciate your friends. Do what you love. Live as if this is all there is.
--Mary Anne Radmacher