"Stuart continued to fight his losing battle to allow his sepoys to wear their caste-marks "
This shows that Option (C) is TRUE.
Options (A) and (B) are contradictory to the given passage.
"A stronger instance than this of European prejudice" shows that the commander-in-chief was not exempt from the European prejudice. So, option (D) is also contradictory to the given passage.
Correct Option: C.