The police raided a rice mill near Sira Gate here on Friday and recovered 10 tonnes of rice and one tonne of wheat meant for distribution under the Public Distribution System.
The PDS rice had come from Bellary district and the owner of Sangam Rice Mill, Shivaprakash, had paid Rs. 1,30,000 for the produce.
Naganna (32) of Bellary was arrested and Rs. 82,000 in cash was recovered from him which he had realised from the sale of PDS rice.
The police said that Naganna used to buy PDS rice from depots in the villages of Bellary district cheaply and then sell it at Rs. 1,350 per quintal to rice mills.
Naganna, the police said, had taken Rs. 50,000 in advance from the rice mill owner.
Shivaprakash and writer of the rice mill, Sunil, have also been taken into custody.
The lorry driver managed to escape and the police are on the lookout for him.
Additional Superintendent of Police R. Lakshman told The Hindu that they went to the rice mill after receiving information that rice bags were being unloaded from a lorry.
The lorry has been seized. A case has been registered in the Tumkur Rural police station.