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Need a clarification that one of the employees had worked for 23 years of service and then quit from the organization. Out of the 23 years of service, in the 2nd year, he had only worked for 170 days (the remaining days as leave without pay) instead of 240 days. When calculating the gratuity, the 2nd year will be considered for gratuity.

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The minimum criteria for eligibility of Gratuity in a year is completion of 240 days of service. Hence gratuity not payable for a year where he worked less than 240 days.
From India, New Delhi
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KK
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As said by kumar, you need not to consider year for calculation if employee had not worked for 240 days.

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