@Bharath-FT , thank you for posting this question here. I understand that you are trying to update the backend pool of application gateway so that it can point to the VMs with your application installed.
The following are some resources that should help you with this issue:
az network application-gateway address-pool - can be used to manage the address pools of an application gateway. The following link has samples to update, add and delete IPs from existing pools -
az network application-gateway address-pool update. Note the use of index for removing existing IP address, while IP address is used for update or add.
Please note that the routing in Application Gateway happens based on the IP/FQDN and not the VM Name. Therefore, the "VM Name" itself is not a valid type to be used for updating the backend addresses. For more details, please see How an application gateway routes a request and ApplicationGatewayBackendAddress in Application Gateway ARM Template
Even in the portal, when updating the Application Gateway's backend pool, if Type is selected as Virtual machine --> the available options are NICs associated to that VM and not the VM itself.
Please let us know if you have any questions.