Can you recount the incident where Sai Baba questioned Nana Chandorkar about a Sanskrit verse he was muttering?

Certainly. Chapter 39 describes an incident where Sai Baba and Nana Chandorkar were together. Baba noticed Nana humming or muttering something under his breath and paused the moment to ask a question, intending to impress a true teaching upon him. Baba commanded Nana to say clearly and slowly what he was reciting so it could be heard. Taking this as an order, Nana recited all four lines of a Sanskrit verse from the Gita. Baba then asked for a detailed explanation and its meaning, which initiated what the text calls the 'Sai-Nana dialogue' to clarify the essence of the verse.