An excluded employee as per definition is one who has withdrawn the PF accumulations on his attaining the age of superannuation or one who had to retire due to some injury etc. The Officer is right in demanding coverage if their withdrawal of PF was not been made on their attaining the age of superannuation or at the age of 55 years.
But once an employee has withdrawn his PF accumulations and also the Pension Fund, he is no longer a member of the PF. But sometimes they write in form 11 the details of their previous membership. This should have resulted in confusion. An employee who has withdrawn the PF and PS should not have written the details of his previous PF membership in form 11. If so, then you should have corrected it.
In respect of any employee whose salary is not more than Rs 15000 it is immaterial whether he was earlier a member or not. He should be given coverage now even if he had withdrawn his past accumulations.