Step 1: Approach
Think about the sizes of atoms. Iron has a radius of about 126 pm and carbon about 77 pm.
Step 2: Fit
A carbon atom is small enough to slip into the octahedral gaps of iron. It does not replace an iron atom, and no lattice site is left empty.
Step 3: Name of the defect
A foreign atom lodged in a gap is an interstitial impurity. This is why steel is harder than pure iron: the carbon atoms block the slipping of layers.
Step 4: Conclusion
Substitutional defects need similar-sized atoms, and vacancy and Schottky defects involve missing atoms or ions. So the correct option is (B).
Final Answer:
Carbon atoms occupy gaps in the iron lattice, an interstitial impurity defect, option (B).
\[ \boxed{\text{Interstitial impurity defect}} \]