Currently Select by Location does not work on Input data with selected records via Selected by Attributes. I think that's a limitation of the tool that should be addressed in a future release.
There are a lot of parameters with Select By Location, it would be helpful if you shared what you are passing the tool, what results you expect, and what you are getting. The default for Selection Type for Select By Location is "New selection", and that starts fresh against the whole data set. If you already have records selected and want to select a subset, the "Selection subset from the current selection" would be the option you want to select.
Oh I see, you are correct, then I guess it would be nice if the Select by Location popup tool shows selected records when selected that dataset as input
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