I haven't actually seen the episode itself but if it's part of the continuity then it indeed happen. From research according to the wikipedia article it states that the events followed the defeat of the Dominators on Dulkis after The Doctor sets off a volcanic eruption. It states
He leaves the TARDIS, along with his companions, Jamie and Zoe, in the
way, though, and it gets buried in lava, blowing a fluid link (The
Daleks) in the process. This forces the Doctor to use the emergency
unit to take the TARDIS away from danger and indeed out of reality
The part where The TARDIS explodes is when they are trying to come back into reality.
They land in a white void and as the Doctor fixes the TARDIS, Jamie
and Zoe are lured outside and are confronted by white robots. The
Doctor gets them back inside but, as they try to return to reality,
the TARDIS explodes and the travellers are scattered into nothingness.
It is possible to assume that they all landed in some sort of strange universe in which the events actually occurred.
Also according to the wikipedia it states The Land of Fiction
(the place where they ended up is a real place, although it's explanation is not 100% canon due to it being in a spin-off media)
The Land of Fiction also features in the Virgin New Adventures
spin-off novels Conundrum and Head Games by Steve Lyons. In Conundrum,
it is revealed that the Land of Fiction was created by the Gods of
Ragnarok. The novels, like all spin-off media, are of uncertain
canonicity. It features once more in the Big Finish Productions audio
adventures City of Spires, Night's Black Agents, The Wreck of the
Titan, and Legend of the Cybermen, this time featuring the Sixth
Doctor (though the protagonists do not realise this until the very end