P.M.
Hmm, you put your dad in a most uncomfortable situation for a man of a previous generation, or any human adult, for that matter – correcting him in front of other people. Now three of you have issues, instead of only you and your son. Please know that I am NOT suggesting you should not have talked to your father – I don't think spanking is a reasonable form of discipline, and have personally found that the techniques offered in some fabulous books by Faber and Mazlish work much better than even time-outs.
However, all of us have that "child" inside that needs TLC, including your dad. He thought he was doing a good thing for both your kids. You called him on it rather abruptly. That whole interaction would have been so much more effective had you waited to talk to him privately. That's really an extension of what you want for your son – to learn not to "react" violently, but to pause to consider more peaceful options. Language can also be violent. Words and ideas can indeed hurt us; they do all the time.
Let me suggest a fabulous set of communication skills that I have found transformational, not only in a few difficult family relationships, but also in understanding myself and my own needs more clearly. I hope you'll google Non-Violent Communication for an explanation of the the basic process and sources of books and classes.
In the meantime, you and your dad are at a standoff. Hold this in your heart for a while, and see whether you can apologize to him for your quick reaction. You can tell him you wish you hadn't put him on the spot, AND that it is terribly important to you that your sons not be spanked.
Best wishes to you all.