I have been trying to figure this out for a while now...
I can record audio coming in from the "SPDIF In" to a file, and then I can play back the same file to the Lineout, but is it possible to "mix" the incoming audio from the SPDIF In to the Lineout only using the mixer?
I know it should be possible since my windows pc does allow for just this scenario (Except it used the Line In instead of SPDIF In).
Your scripts look OK. But...
I think I know what happens. When the script runs at boot-up, it runs with root privileges.
I don't know why, but when root writes to /dev/null early in the boot sequence, the permissions on it change to -rw-r--r--
Suddenly only root can write to /dev/null! Not good. That's probably why the login (and much else) fails.
You should be able to get a text console login prompt by pressing Ctrl-Alt-F2, though.
I have observed that arecord -q -Dhw:0 -r 192000 -c2 -d 1 -f S24_LE always fails if it is the first command to the sound system after boot.
For some reason it likes to be tickled with its default values first, so this sequence (run in a terminal) works:
arecord -q -Dhw:0 -r 44100 -c2 -d 1 -f S16_LE /dev/null
arecord -q -Dhw:0 -r 192000 -c2 -d 1 -f S24_LE /dev/null
I have never used Upstart myself, I'm old and set in my ways 
So, I have started on an old-fashioned init script.
I have quick-hacked in some code that might make it just about usable for you.
On my RPi it works OK.
#!/bin/sh
#
# wolfson sound card initscript
#
# This is still very much just the start of a work in progress.
# For now, it only mutes/unmutes SPDIF In and Line Out
# and sets the SPDIF rate and bit depth, using hardcoded defaults.
#
# TODO: Lots...
# A configuration file in /etc/default would be nice.
#
#
### BEGIN INIT INFO
# Provides: wolfson-snd
# Required-Start: $local_fs $remote_fs
# Required-Stop: $remote_fs
# Default-Start: S
# Default-Stop: 0 1 6
# Short-Description: Set Wolfson Audio Card SPDIF sampling rate and bit depth.
# Description: This script unmutes SPDIF In and Line Out and sets SPDIF sample rate on bootup.
# It mutes SPDIF In and Line-Out on shutdown and reboot.
### END INIT INFO
DEFAULT_SPDIF_RATE=96000
DEFAULT_SPDIF_BITS=24
# Don't use set -e; check exit status instead
# Exit silently if ALSA package is no longer installed
[ -x /usr/sbin/alsactl ] || exit 0
PATH=/usr/local/sbin:/usr/local/bin:/usr/sbin:/usr/bin:/sbin:/bin
MYNAME=/etc/init.d/wolfson-snd
. /lib/lsb/init-functions
. /usr/share/alsa/utils.sh
# $1 EXITSTATUS
# [$2 MESSAGE]
log_action_end_msg_and_exit()
{
log_action_end_msg "$1" ${2:+"$2"}
exit $1
}
# $1 PROGRAM
executable()
{
# If which is not available then we must be running before
# /usr is mounted on a system that has which in /usr/bin/.
# Conclude that $1 is not executable.
[ -x /bin/which ] || [ -x /usr/bin/which ] || return 1
which "$1" >/dev/null 2>&1
}
executable amixer || { echo "${MYNAME}: Error: No amixer program available." >&2 ; exit 1 ; }
executable arecord || { echo "${MYNAME}: Error: No arecord program available." >&2 ; exit 1 ; }
TEMPFILE=/tmp/wolfson-snd.wav # Don't use /dev/null, it gets write-protected by root running arecord(!)
# Get card number
WOLFSON_CARD=`arecord -l | grep sndrpiwsp | awk '{print $2}' | sed 's/://g'`
[ -z "$WOLFSON_CARD" ] && { echo "${MYNAME}: Error: Wolfson Sound Card not found!" >&2 ; exit 1 ; }
# Set defaults
TARGET_CARD="hw:"${WOLFSON_CARD}
EXITSTATUS=0
RATE="$2"
BITS="$3"
[ ! -z "$4" ] && TARGET_CARD="$4"
[ -z "$RATE" ] && RATE=${DEFAULT_SPDIF_RATE}
[ -z "$BITS" ] && BITS=${DEFAULT_SPDIF_BITS}
# [ -z "$TARGET_CARD" ] && TARGET_CARD="hw:0"
case "$1" in
start)
log_action_begin_msg "Setting up Wolfson Audio Card ${TARGET_CARD} $RATE $BITS"
amixer -q -D${TARGET_CARD} cset name='SPDIF in Switch' on
# Card needs to do something (anything?) at 44.1k for some reason before we can switch to other rates.
arecord -q -D${TARGET_CARD} -r 44100 -c2 -d 1 -f S16_LE $TEMPFILE
arecord -q -D${TARGET_CARD} -r ${RATE} -c2 -d 1 -f S${BITS}_LE $TEMPFILE
amixer -q -D${TARGET_CARD} cset name='HPOUT2 Digital Switch' on
EXITSTATUS=$?
rm -f $TEMPFILE
log_action_end_msg_and_exit "$EXITSTATUS"
;;
stop)
# Mute SPDIF-in and Line-Out...
amixer -q -D${TARGET_CARD} cset name='HPOUT2 Digital Switch' off
amixer -q -D${TARGET_CARD} cset name='SPDIF in Switch' off
# ... and save the muted state to keep silent during bootup.
if MSG="$(alsactl store sndrpiwsp 2>&1)" ; then
EXITSTATUS=$?
sleep 1
else
log_action_cont_msg "warning: 'alsactl store${TARGET_CARD:+ $TARGET_CARD}' failed with error message '$MSG'"
fi
EXITSTATUS=$?
;;
restart|force-reload)
EXITSTATUS=0
$0 stop || EXITSTATUS=1
$0 start || EXITSTATUS=1
exit $EXITSTATUS
;;
*)
echo "Usage: $MYNAME {start | stop} [RATE] [BITS] [CARD]" >&2
exit 3
;;
esac
Save this script as /etc/init.d/wolfson-snd
Only root can write in /etc/init.d, so sudo is your friend.
Change the values in lines 23 and 24 to what you need and then run
sudo update-rc.d wolfson-snd start 17 S . stop 17 0 1 6 .
The two dots are important!
Then, try a reboot and cross your fingers 
Oh, and don't forget to remove your upstart script first.
--
Ragnar