It's most definitely a LM171W02 panel in the iMac G4 which is definitely a 6-bit panel, you can see the specs here: https://www.panelook.com/modelsearch.php?keyword=LM171W02&se...
all of the LM171W02 panel family are 6-bit (notice the colors column lists 262k)
I wouldn't say they lied so much as they obfuscated the truth; the machine supported millions of colors, and with dithering techniques the monitor could look like it was displaying quite a lot of colors, but only the 20" display could display millions of colors without dithering (which was just like basically every other TN-based machine and display of the time)