Well, thanks for the overwhelming replies. I traced down the problem to the function 'get_pagenum_link' in the file 'wp-includes/template-functions-links.php'.
it I had to do two things to solve this issue, first at line 426 where it says
$qstr = '/' . $index . $qstr;
the extra addition of $index variable has to taken off, so basically it becomes
$qstr = '/' . $qstr;
this will solve the issue of having two index.php files mentioned in the navigation link, but still the navigation link will have the default file displayed as "Index.php" instead of "index.php" (case sensitive)
to solve this issue after line number 392 where it says
$qstr = preg_replace('|^/+|', '', $qstr);
add this line
$qstr = 'index.php';
I guess there should be a better way to make the second point happen, but since I am not an expert in PHP and I have to make a fix for the time being this will do.
posted the above message so just in case it will solve some other poor soul who maybe stuck with the same issue.
Regards,
CC