Justice Manmohan expressed surprise that no FIR has been lodged with the police in connection with the scam and said the "scamsters" must be getting emboldened by the state government's "inaction".
The court directed the state to conduct whatever internal enquiry it wishes to and then lodge a police complaint in connection with the scam within two weeks.
"I am surprised no complaint has been filed. This is straightaway a police case. You (state) should have right away lodged a police complaint. The police should have been set in motion.
He was also "surprised" that the officials concerned of the health department of the state did not come to know about the use of forged smart cards and termed the scheme and the mechanism used to implement it as "flawed".
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"It is surprising your (UP government's) officers have not come to know about the forged smart cards. There is a flaw in your institutional mechanism. Your scheme is also flawed," the court said.
Under the scheme annual health insurance cover to the tune of Rs 30,000 is provided to five members of a family belonging to below poverty line (BPL) category.
As per the scheme, which is currently operational in 25 states including UP, the Labour and Employment Ministry would pay 75 per cent and the rest 25 per cent cost would be borne by the state government.