You used nslookup the wrong way.
You were suppose to either do the TXT CHAOS version lookup or any other query like for example below:
nslookup pi-hole.net 208.67.222.222
Above one will try to query the DNS server 208.67.222.222 to resolve the name pi-hole.net to an IP address.
Although you used nslookup the wrong way, it indicates pihole-FTL is working properly. pihole-FTL recevied the query to do a reverse lookup for 208.67.222.222, pihole-FTL forwarded the query to its upstream configured DNS server (208.67.222.222 or 208.67.220.220),
it got a reply and answer was returned via 127.0.0.1 port 53 on the loopback network interface.
I suspect iptables not configured properly and blocking.
Have you already tried to do below and run some tests ?
My Pi's iptables didn't have many rules in the first place, but I tried flushing them and rerunning nslookup -type=txt -class=chaos version.bind $(hostname -I) with the same result.