Order I, Rule 10 of the CPC, 1908 gives the court power to correct errors in the array of parties, and the question asks what the court may do when a person is found to have been wrongly impleaded as defendant.
Only the substitution-or-addition remedy in Order I, Rule 10(2) matches how the CPC actually deals with a wrongly impleaded defendant.
Hence, the correct answer is Permit substitution or addition of the proper defendant.