Subodh,
You are probably experiencing the ProxyARP in action. The device will ask for MAC address of every IP it talks to using ARP. The L3 switch does not own the IP address in question, however, according to its routing table, it known the route to it, therefore it responds using its own MAC address. As a result, the device sends its IP packet to the L3 switch, exactly as if the default gateway was correctly configured.
There are various disadvantages to the ProxyARP, notably a big ARP traffic and a large ARP cache on the device that relies on the ProxyARP function, and usually, it is better turned off. However, in your case, it is probably the only way to ensure that your device is able to talk to other networks.
Read here for further information:
http://www.cisco.com/en/US/tech/tk648/tk361/technologies_tech_note09186a0080094adb.shtml
Best regards,
Peter