/**
 * Implements hook_permission().
 */
function example_permission() {
  return array(
    'edit own department users' => array(
      'title' => t('Edit own department users'),
      'description' => t('Allowed department manager to edit own department users.'),
    ),
  );
}

/**
 * Implements hook_menu_alter().
 */
function example_menu_alter(&$items) {
  $items['user/%user/edit']['access callback'] = 'example_custom_user_edit_access';
}

/**
 * Custom access callback for user account editing.
 */
function example_custom_user_edit_access($account) {
  if (user_access('edit own department users')) {
    // We perform our check only for user with edit own department permissions.
    global $user;

    // Load user ( Department manager) via entity api.
    $user_wrapper = entity_metadata_wrapper('user', $user);

    // Get array of managed department terms id.
    $user_departments = $user_wrapper->field_user_department_managed->value();

    // Load user (Editor) via entity api.
    $account_wrapper = entity_metadata_wrapper('user', $account);
    // Get array of department belongs to terms id.
    $account_departments = $account_wrapper->field_user_department_belongs->value();

    // Check any common term id.
    $common_departments = array_intersect($user_departments, $account_departments);

    return !empty($common_departments);
  }
  // For other user we perform default check.
  return user_edit_access($account);
}