It can be flagged without showing "[flagged]". That tag only gets shown when something is flagged to death. Your item wasn't flagged to death because it's still active.
I suspect it's mostly that a sizeable proportion of people on the site decided that it doesn't really fit with the theme and they don't want to see things like that, so they flagged it. That, associated with the large number of comments and comparatively few upvotes caused the "flame war" penalty to apply.
No conspiracies necessary, all explained by the regular dynamics.
You're quite right that energetic conversations can be really good, though, which means we have to review the list of threads that have gotten penalized by the flamewar detector and turn the penalty off for the ones that don't deserve it. We do that several times a day. It's not a perfect solution though, because sometimes a thread languishes for hours before we notice that that's happened.