Step 1: A dumpy level has two permanent adjustments that must both be satisfied for the instrument to give a true horizontal line of sight when its bubble is centred.
Step 2: The first adjustment concerns the level tube (bubble tube). Its axis must be set perpendicular to the vertical axis of the instrument. This way, when the bubble is centred, the vertical axis of the level truly points straight up and down, which in turn keeps the horizontal circle and the line of sight properly horizontal as the telescope is swung around. So Statement (I) describes a genuine, correct relationship.
Step 3: The second adjustment concerns the line of collimation, the line of sight through the telescope. For the level to read a correct horizontal staff reading, this line of sight must be made parallel to the axis of the bubble tube, not perpendicular to it. If the line of collimation were perpendicular to the bubble tube axis instead of parallel, centring the bubble would not make the line of sight horizontal at all, it would point straight down or up, which defeats the purpose of a levelling instrument.
Step 4: Because Statement (II) swaps parallel for perpendicular, it misstates the real adjustment condition and is incorrect.
Step 5: So Statement (I) is correct and Statement (II) is incorrect, which is option 3.