Step 1: Water storage efficiency compares the water actually stored in the root zone with the water needed to bring the root zone up to field capacity. When water supply is scarce, or when the soil is slow to let water penetrate so that irrigation takes a long time, storing the applied water efficiently in the root zone matters a great deal, so Statement (I) is correct.
Step 2: Water application efficiency is the ratio of water stored in the root zone to the total water applied. As more water is applied in one irrigation than the root zone can hold, the extra water is lost to deep percolation and/or surface runoff, so the efficiency ratio falls. Statement (II) is therefore also correct.
Both statements are correct, so the answer is option 1.