BUG: Fix DataFrame.groupby().apply() for NaN groups with dropna=False

doc/source/whatsnew/v1.1.2.rst

@@ -29,6 +29,7 @@ Bug fixes
 - Bug in :class:`Series` constructor raising a ``TypeError`` when constructing sparse datetime64 dtypes (:issue:`35762`)
 - Bug in :meth:`DataFrame.apply` with ``result_type="reduce"`` returning with incorrect index (:issue:`35683`)
 - Bug in :meth:`DateTimeIndex.format` and :meth:`PeriodIndex.format` with ``name=True`` setting the first item to ``"None"`` where it should bw ``""`` (:issue:`35712`)
+- Bug in :meth:`DataFrame.groupby(...).apply(...)` raising error with ``np.nan`` group(s) when ``dropna=False`` (:issue:`35889`)
 -
 
 .. ---------------------------------------------------------------------------

pandas/core/reshape/concat.py

@@ -11,6 +11,7 @@
 
 from pandas.core.dtypes.concat import concat_compat
 from pandas.core.dtypes.generic import ABCDataFrame, ABCSeries
+from pandas.core.dtypes.missing import isna
 
 from pandas.core.arrays.categorical import (
     factorize_from_iterable,
@@ -619,17 +620,16 @@ def _make_concat_multiindex(indexes, keys, levels=None, names=None) -> MultiInde
         codes_list = []
 
         # things are potentially different sizes, so compute the exact codes
-        # for each level and pass those to MultiIndex.from_arrays
-
+        # for each level and pass those to MultiIndex.from_arrays.
         for hlevel, level in zip(zipped, levels):
             to_concat = []
             for key, index in zip(hlevel, indexes):
-                mask = level == key
+                mask = (isna(level) & isna(key)) | (level == key)
                 if not mask.any():
                     raise ValueError(f"Key {key} not in level {level}")
-                i = np.nonzero(level == key)[0][0]
-
+                i = np.nonzero(mask)[0][0]
                 to_concat.append(np.repeat(i, len(index)))
+
             codes_list.append(np.concatenate(to_concat))
 
         concat_index = _concat_indexes(indexes)

pandas/tests/groupby/test_groupby_dropna.py

@@ -276,3 +276,58 @@ def test_groupby_dropna_datetime_like_data(
     expected = pd.DataFrame({"values": values}, index=pd.Index(indexes, name="dt"))
 
     tm.assert_frame_equal(grouped, expected)
+
+
+@pytest.mark.parametrize(
+    "dropna, data, selected_data, levels",
+    [
+        pytest.param(
+            False,
+            {"groups": ["a", "a", "b", np.nan], "values": [10, 10, 20, 30]},
+            {"values": [0, 1, 0, 0]},
+            ["a", "b", np.nan],
+            id="dropna_false_has_nan",
+        ),
+        pytest.param(
+            True,
+            {"groups": ["a", "a", "b", np.nan], "values": [10, 10, 20, 30]},
+            {"values": [0, 1, 0]},
+            None,
+            id="dropna_true_has_nan",
+        ),
+        pytest.param(
+            # no nan in "groups"; dropna=True|False should be same.
+            False,
+            {"groups": ["a", "a", "b", "c"], "values": [10, 10, 20, 30]},
+            {"values": [0, 1, 0, 0]},
+            None,
+            id="dropna_false_no_nan",
+        ),
+        pytest.param(
+            # no nan in "groups"; dropna=True|False should be same.
+            True,
+            {"groups": ["a", "a", "b", "c"], "values": [10, 10, 20, 30]},
+            {"values": [0, 1, 0, 0]},
+            None,
+            id="dropna_true_no_nan",
+        ),
+    ],
+)
+def test_groupby_apply_with_dropna_for_multi_index(
+    dropna, data, selected_data, levels
+):
+    # GH 35889
+
+    df = pd.DataFrame(data)
+    gb = df.groupby("groups", dropna=dropna)
+    result = gb.apply(lambda grp: pd.DataFrame({"values": range(len(grp))}))
+
+    mi_tuples = tuple(zip(data["groups"], selected_data["values"]))
+    mi = pd.MultiIndex.from_tuples(mi_tuples, names=["groups", None])
+    # Since right now, by default MI will drop NA from levels when we create MI
+    # via `from_*`, so we need to add NA for level manually afterwards.
+    if not dropna and levels:
+        mi = mi.set_levels(levels, level="groups")
+
+    expected = pd.DataFrame(selected_data, index=mi)
+    tm.assert_frame_equal(result, expected)