Order I Rule 10 of the CPC is the provision written specifically to handle a wrongly impleaded party, so checking each option against what that rule actually authorises settles the question.
Since the Code's own provision for this precise problem is corrective rather than terminal, allowing substitution or addition of the correct defendant is the outcome the CPC actually provides for.
The four options split naturally into three that end or restart the case and one that simply fixes it, and lining them up against the CPC's underlying philosophy of curing defects rather than punishing genuine litigants makes the correct choice clear.
Once the three case-ending options are recognised as inconsistent with the CPC's corrective approach to party mistakes, the option permitting substitution or addition of the proper defendant remains as the outcome the Code actually authorises.
Therefore, the correct answer is permit substitution or addition of the proper defendant.