Improving Velocity Estimation Using Multiple Sensors in a Dynamic System I have a sensor reduction model which gives me a velocity estimate of a suspension system(velocity 1) .

This suspension system estimate velocity is used to calculate another velocity(velocity 2) via a transfer function/plant model.

Can I use velocity 2 to improve my velocity estimate (velocity 1) through Kalman filtering or through some feedback system.??
You can do that if you have new data to merge in.
For instance if you have a sensor for Velocity 1 and a sensor for Velocity 2 and in addition a connection between Velocity 1 and Velocity 2 you can use Kalman.

Yet if you have only one sensor for Velocity 1 which with the transfer system you estimate the Velocity 2 there is no additional info to fuse in.

What might be done is that if you have information about the model of Velocity 2 in time you can use that (Though, the right thing to do would be reflect this model into Velocity 1 by the connection of the two, apply Kalman on Velocity 1 and from there infer Velocity 2).