Source user/group based PBR rule for MS destinations not working as expected
Office 365 Destinations are Auth Exempted hence source user/group based PBR rule can not work for Office 365 Destinations and this is expected behavior.
Enable authentication for Office 365 Destination from Policy > Authentication Policy. This will enable authentication for all Office 365 Destinations.
For portal managed policy, if you want to enable authentication only for selected Office 365 Destination domain then please reach out to technical support.