Please submit your concern

Explanation:

The last paragraph clearly gives us the answer: “Churchill opposed this, and wanted to tax India rather than owe it money. But he was overruled by India hands who said India would resist payment, and paralyze the war effort.” Britain was afraid to tax India as it could paralyse the war effort (option 3).
Australia, Canada and New Zealand were paying the conquerors (option 1 ruled out) and not Indian troops. 
It has not been indicated in the passage that World War I payments were made to compensate for World War II (option 2 ruled out).
Although what option 4 states is true according to the passage, but the premise did not work for India (option 4 ruled out).

Hence, the correct answer is option 3.