Writing off a debt as “bad” feels like a simple bookkeeping call — the customer stopped paying, so the money is gone. But under Malaysian tax law, calling a debt bad and proving it’s bad for deduction purposes are two very different things. A 2026 High Court decision involving Nam Leong Department Store (Mukah) Sdn Bhd shows just how high that bar sits — and how easily an under-documented write-off can be disallowed.
Why Was the Bad Debt Deduction Disputed?
For the Year of Assessment (YA) 2011, Nam Leong — a general trading and department store business — wrote off several debts and claimed a deduction under Section 34(2) of the Income Tax Act (ITA) 1967.
The Director General of Inland Revenue (DGIR) disallowed the claim and raised Notices of Additional Assessment. The central legal question: did these debts qualify as “bad debts reasonably estimated to be irrecoverable” during the relevant basis period, as Section 34(2) requires?
How Both Sides Argued Their Case
Nam Leong’s Position
The taxpayer argued the debts were genuinely irrecoverable:
- Three reminders had been sent to the debtors between 2008 and 2009.
- Three of the debtors had reportedly ceased business operations by 2011, making further legal action pointless.
- Public Ruling No. 1/2002 supported treating this as a “reasonable estimate” of irrecoverability.
The DGIR’s Position
The Inland Revenue Board pushed back on both the evidence and the effort:
- Nam Leong failed to produce sufficient documentary proof that the reminders were ever sent.
- No substantive recovery steps — such as legal action, arbitration, or negotiation — were taken.
- The taxpayer gave no detailed explanation of the nature and specifics of the individual debts.
From the Special Commissioners to the High Court
- The Special Commissioners of Income Tax (SCIT) dismissed Nam Leong’s appeal on 5 January 2024.
- Nam Leong appealed further to the High Court.
- On 2 February 2026, the High Court affirmed the SCIT’s decision, dismissing the appeal outright.
Why the Court Ruled Against the Taxpayer
The High Court’s decision rested on two key findings:
- The burden of proof sits with the taxpayer. It is the company’s job to demonstrate that a debt is genuinely bad and that all reasonable recovery steps have been exhausted — not the DGIR’s job to disprove it.
- A handful of old reminders isn’t enough. Internal write-offs or a small number of reminders sent years earlier, with no follow-up or escalation, do not automatically meet the “reasonably estimated to be irrecoverable” threshold.
How Nam Leong Failed to Meet The Public Ruling 4/2019 in 4 Aspects
While Nam Leong originally relied on the older Public Ruling No. 1/2002, today’s standard is Public Ruling (PR) No. 4/2019: Tax Treatment of Wholly and Partly Irrecoverable Debts and Debt Recoveries. The Nam Leong decision functions as judicial confirmation of just how strictly these standards are applied.
1. “Reasonable Steps” Must Go Beyond Reminders (PR 4/2019, Para 5.3.1)
The Public Ruling expects evidence of escalating recovery efforts — reminders, debt restructuring, negotiation or arbitration, and ultimately legal action. Nam Leong’s three reminders, sent between 2008 and 2009 and never followed up, fell short. A commercially prudent business, the court found, would have escalated to a Letter of Demand (LOD) or legal counsel when reminders failed.
2. Commercial Considerations vs. Tax Convenience (PR 4/2019, Para 5.3)
A write-off must be based on sound commercial reasoning — not filed simply for tax convenience. If the cost of pursuing a debt genuinely outweighs its value, that’s a valid commercial reason, provided it’s documented. Nam Leong argued legal action wasn’t cost-effective, but had no contemporaneous memo or legal advice to back that judgment call. Without documentation, the argument didn’t hold.
3. The Irrecoverability Evidence Checklist
Here’s how Nam Leong’s evidence measured up against PR 4/2019’s conditions for irrecoverability:
| PR 4/2019 Condition | Nam Leong’s Claim | Outcome |
| Debtor has ceased business | Claimed 3 debtors ceased operations in 2011 | Failed — no SSM search or liquidator’s letter provided |
| Various attempts to trace debtor | Claimed debtors couldn’t be contacted | Failed — no evidence of site visits or searches beyond old addresses |
| Legal action / LOD issued | No formal LOD or arbitration initiated | Failed — years of inaction undermined the “reasonable estimate” |
| Debt previously included in gross income | Debts were trade-related, from general trading activities | Met |
4. The Statute-Barred Trap
PR 4/2019 also flags statute-barred debts (typically after 6 years under the Limitation Act) as a relevant factor. But timing tripped Nam Leong up here too: its LODs were issued only after the debts were nearly statute-barred or had sat dormant for years. Both the Ruling and the court are clear that “reasonable steps” need to be taken contemporaneously — you can’t let a debt go stale for years and then retroactively claim it as bad in a specific year of assessment.
What This Means for Malaysian Businesses
The Nam Leong case sets a clear evidentiary bar for anyone writing off bad debts:
- Document every recovery step as it happens — reminders, LODs, negotiations, legal advice — not after the fact.
- Escalate beyond reminders. A few unanswered letters years apart won’t satisfy Section 34(2) on their own.
- Keep contemporaneous commercial justification for any decision not to pursue further recovery, especially if cost-effectiveness is the reason.
- Act before the clock runs out. Waiting until a debt is nearly statute-barred to claim it as bad undermines the “reasonable estimate” standard.
Conclusion
The Nam Leong decision distils neatly into what practitioners are now calling tax law’s “golden rule” on bad debts: deductibility isn’t granted by the passage of time, but by the proof of effort. A debt doesn’t become deductible simply because a customer stopped answering the phone — it becomes deductible when the business can show, with contemporaneous documentation, that it took genuine, escalating steps to recover the money before writing it off.
If your business is carrying long-outstanding receivables, it’s worth reviewing your recovery documentation now — well before the relevant year of assessment closes, and well before an IRB audit forces the question.
To deepen your understanding, explore these related Malaysian tax case studies:
- Borrowing Costs: Bank Guarantee Fees Tax Case Study Malaysia
- Absorbed Indirect Taxes: Tax Deductibility of Absorbed Service Tax
- Facilitation Funds: Are They Tax Deductible in Malaysia?
