Dont know if its just me, but I would have hit the roof.
She is clearly disrespecting your wishes as the mother! and she is also undermining you...and so is your oh. get him told!! until your mil can start respecting your wishes i wouldnt let your lo go back there. but thats just my opinion. and if ur oh doesnt like it, tell him to get lost as well. imagine being ok with people smoking in the same room as ur baby!! :x