Sensitivity label works in Outlooks web app but not desktop app

We are currently using M365 Business Premium licence and hence are using Azure Information Protection Premium Plan 1. We created an 'Internal' sensitivity label on compliance.microsoft.com, with "assign permissions now" configuration granting co-author access to all users and groups within the organisation . The label is working in the user's Outlook web app. However, when drafting a new email in Outlook desktop app, the option to select the label is there, but when I click on the label itself it reverts back to "no label".

All the users to which label policy is scoped can see the Label. but can't apply it. Some insights:
1. If I create a label with "Let users assign permission" configuration and then select the "Encrypt-Only" or "Do-Not-Forward" options. Then users can see that label and apply it in the Outlook desktop app and web.

2. If I create labels with "Assign Permission now" configuration, scope it to both file and email, grant co-author access to 'Authenticated Users', or 'all users and groups within the organisation', then users can select the label in Word/Excel etc, but not Outlook Desktop app. They can assign the same label in Outlook Web though.

We are on the latest  - Microsoft® Outlook® for Microsoft 365 MSO (Version 2403 Build 16.0.17425.20176) 64-bit. We use built-in labels by Office apps and never used AIP unified labelling client or the classic client.