1. Champions are immortal, not invincible. A champion can still get killed by a dude, he just doesn't age.
2. Shang Tsung pulled the exact same stunt in MK1/Shaolin Monks, he wasn't supposed to fight at all but did.
3. Nothing in the scene actually states that Kintaro is the final challenge of the tournament. Kung Lao assumes that defeating Tsung/Quan Chi is the end of the tournament, but is then informed otherwise. It's possible that he simply assumed incorrectly again, and Shao Kahn... corrected him.
I think that answers your original question.
Apart from that, MK tournament rules don't make any sense anyway, as the only consistently enforced rule seems to be that if you've been defeated then you can't participate in that tournament again. There's no round robin system (everyone fights 4 opponents in a row), not everyone who enters actually gets defeated (Sonya in MK9-1), people can enter midway through a tournament (Sub-Zero in MK9-2), people can change sides midway through a tournament (Scorpion in MK9-1), it's just complete and utter chaos.