Step 1: Understanding the Concept
Primary treatment only removes floating and settleable solids by physical methods.
Step 2: Secondary treatment
The primary effluent is aerated in tanks so that aerobic bacteria and fungi grow as flocs and consume organic matter, lowering the BOD.
Step 3: Activated sludge
The flocs are allowed to settle. This sediment is the activated sludge, and part of it is returned to the aeration tank as inoculum.
Final Answer:
Activated sludge forms during secondary treatment.
\[ \boxed{\text{(C) }\text{secondary}} \]