@SSJ2
When Goku defeated Panpoot, all Tsuru said was "maybe he really defeated Tao"
Chapter: 122, P12.3-6
Context: after Goku defeats Panput
Tenshinhan: “That wasn’t one blow. While brushing off his opponent’s fast punch with his right hand, with his left he showered him with…3 rapid-fire elbow blows…That brat, he’s no ordinary person.”
Tsuru-sennin: “I see…maybe he really did defeat Tao Pai Pai…”
Tenshinhan: “This tournament is finally getting interestig…”
That is, the idea Goku did it isn't so off. Not that the confirmation came to him already.
Chapter: 127, P13.1-2
Tsuru-sennin: “H-he’s outrageous…He just might be good enough to have defeated Tao Pai Pai…”
Kame-sennin: “Goku gets bigger and bigger each time I see him…I get the feeling that my position’s already vanished
…”
Before it, may be that Tsuru vs Panpoot sees Goku's defeating Tao as simply not something to be ignored out of luck. He knew he had something special on him and it triggered Tenshinhan, as he said the tournament is finally getting interesting, meaning Goku's displaying vs Panpoot awakened in him more excitement than Yamcha.
later on, Tsuru gave the confirmatin that he "might be good enough" to defeat Tao, showing that the earlier potential in being a big deal vs Panpoot, was confirmed as the case post his performance vs Kuririn.
VIZ makes that line make more sense... It has Tsuru saying "NOW I see he could have defeated Tao". As if Panpoot took it from an impossibility of it happening or being sheer lucky to it being maybe reality... And the Kuririn battle confirmed it.
So it just doesn't read as Yamcha and Kuririn having power to best Tao. Goku who defeated Kuririn is the one with power to defeat Tao... The latter which seems more aligned with Kame Sennin in power by the way Toriyama worded Kame's statement in conjunction with Tsuru. It's slopoy writing, but the way Toriyama gave all this emphasis to Tao after, doesn't give the vibe he's below Yamcha and Kuririn, much less Chaozu and Chappa.
The best way to make that work from where I stand, is assuming Goku was using a match level vs Son Gohan, much like he said vs Tenshinhan later on that now he sees Ten has killing intention, he can go all out. Maybe Goku would showcase more of his power when he got his tail taken off and said "now I'm really mad", while beforehand he took that more as an entertaining match than a kill or to die vs Gohan... And the level he used to defeat Kuririn being the one he used to beat Tao.
Kame-Sennin likely never saw Tao, I dunno, but his disbelief at Goku doing it also adds to the narrative. Even being Goku, whom he expected as the top dog of his disciples, defeating Tao, seemed hard ro grasp for him.
it's somewhat of a sloppy writing, but there's no cues of Tsuru being in denial, otherwise he wouldn't accept Tao being surpassed when Goku showed his full match level. On the opposite, he seemed to have a specific level for Tao which required him to see in detail to lay the hammer that such in fact happening. And the prime Tao stuff always seemed like a stretch to me. At least we know Tsuru used to keep in touch with Tao as he said he hadn't heard from him for 3 years, so they used to meet at least.