I agree. You're on a loser. They most likely have a lawful development certificate that the work is PD. The 1948 date also applies to the changes allowing additional storeys to buildings introduced recently, but a bungalow with a dormer is thought of as a 1 1/2 storey building or chalet bungalow and my view is that a dormer doesn't fall within the "additional storey" extension to PD rights - prob why confirmation that PD extension is OK.
Now they have official PD confirmation, the council will not change their mind easily or they could be open to claims for compensation; it would have to be a very clear cut breach of PD rules taken to the ombudsman rather than any sort of subjective interpretation, and I don't believe you will be successful in challenging this.
Anything written in the title restricting development will be a covenant between whoever wrote the covenant when the house was built and the owner occupier of the building. It can only be enforced by the original beneficiary of the covenant and since this was written in 1935, highly unlikely anyone will be around to try and enforce. You as a neighbour, even if you have the same covenant in your title, have no mechanism as a 3rd party to enforce a covenant written in someone else's title.