In an order passed pursuant to search, the AO observed that the quantity of sale of milk declared in the books was higher than that based on the vouchers and other documents found in the search would suggest. The AO held that the assessee was actually selling milk products but reflecting the same as sale of milk to suppress profits. The AO estimated the allegedly correct profits by applying the higher GP rate of milk products sale to milk sale. Penalty was also levied subsequently. Held that simply because the quantum additions were upheld by the appellate authorities would not mean that penalty could be sustained. Additions were made on preponderance of probability by estimating profits by treating sale of milk as sale of milk products and applying a higher GP rate. There was no clinching evidence on record to suggest that the sale of milk was bogus. These circumstances may be sufficient to reject the books under section 145(3) and to estimate profits, but are insufficient to levy penalty. (AY. 2006-07 and 2007-08)