Revoke - is my understanding correct?
North, a defender, has a minor penalty card: S3
West leads a spade. North plays S5 from his hand. East objects.
Law 50C: When a defender has a minor penalty card, he may not play any other card of the same suit below the rank of an honour
until he has first played the penalty card.
Thus the S5 must be withdrawn
Laws 49, 50: The S5 becomes a major penalty card
Law 50B: S3 also becomes a major penalty card
Seeema a bit harsh, but I can't see anything wrong with it, legally speaking.

Comments
I think Law 50B is enough to handle the entirety of this. The S5 is a major penalty card because it was "exposed through deliberate play". Law 51A then allows the declarer to choose whether the S3 or S5 is played to the trick. If declarer chose the S3, then the S5 would remain as a major penalty card – and that means that designating the S3 as major as well doesn't actually give any meaningful disadvantage to the defence. Note that the defenders don't actually end up with two penalty cards for any meaningful length of time, because one of them will be played to the current trick.
So I agree with you about the outcome, but viewed like this, it doesn't seem particularly harsh. (The main purpose of minor penalty cards is to avoid defenders using knowledge of the exposed card to make partner's carding easier to read. If the S5 ended up minor rather than major, then defenders would actually have an advantage from the penalty card: the reason you play a particular spot card is not because you think it's more likely to hold the trick, but to give partner the information "I could have played the 3 but chose to play the 5 instead" which can be used as a legal form of communication. As such, some larger penalty is needed for fairness, and making the remaining spot card a major penalty card is about the smallest available penalty that's larger than a minor penalty card.)
Wouldn't doing this to signal fall foul of 72B1 and 72C?
I meant that doing that is legal when there hasn't been an irregularity (and the main reason to play one spot card rather than another). If a player plays the wrong spot card when they have a minor penalty card, I'd expect it to still be an attempt to signal out of habit (even though the minor penalty card makes that illegal) – but maybe I'm wrong in that expectation.