Can my advisor's advisor (he is a very well known person in the field) be a reviewer for a paper written by me along with my advisor (I mean the authors are me and my advisor). The work is extending/generalizing a work of my advisor's advisor. I mean whether conflict of interest will allow this. Thanks in advance. Any help/suggestions will be useful.
Conflicts of interest have to be determined individually for each author of each work product (paper, proposal, book, etc.). If a person has a conflict for any author, she should not act as a reviewer.
In the case you cite, your advisor’s advisor cannot act as a reviewer for your advisor, and thus cannot serve as a reviewer. If your advisor is not a coauthor, then your advisor’s advisor could act as a reviewer, but I would likely err on the side of caution and not nominate him as a reviewer.
Have a look at the submission instructions, you may also link them here. It depends on the conference/journal/publisher/... how they define a conflict of interest. Most likely, this will not work out and is a typical case of CoI if they have collaborated very little time ago.