Hi. The feature you're referring to is called CinemaScape. It definitely works with discs played from the disc slot or the Disc Server. You need to ensure that you've done two things.
1) Be sure CinemaScape is turned on! This is in the browser interface, on the Settings tab. Click the Settings button that's in the group of information and controls for your Alto. This opens a second window, which defaults to the Video settings tab. Scroll down to find the CinemaScape settings. Since you've said you want to leave the lens in place all the time, that would be CinemaScape 2.35 Anamorphic.
2) The disc must have been bookmarked by Kaleidescape. This is necessary because one of the things we do during bookmarking is to record the movie's aspect ratio. Without that information, CinemaScape can't apply the necessary scaling. There's currently no way to enter this information yourself. When you open the details sheet for the window in the onscreen display, if you only see a "Play Disc" menu item, then the disc has not been bookmarked. If you see "Play Movie", "Play All Episodes", "Play Concert", etc., it has been.
I hope this answers your question!