This is more a question related to the AzureRM provider and would be better located in the Terraform providers category, but the below should help:
As per the documentation for azurerm_virtual_machine that argument is not supported.
However, the azurerm_virtual_machine resource has been superseded by the azurerm_linux_virtual_machine and azurerm_windows_virtual_machine resources (see the note at the top of the azurerm_virtual_machine page.)
The good news is that the new azurerm_linux_virtual_machine resource does support the encryption_at_host_enabled argument. If you update your module to use the newer azurerm_linux_virtual_machine resource then you can enable encryption at host using the argument you have been trying.
HTH
Happy Terraforming