The correct option is 1, which states that both statements are individually true and Statement II is the correct explanation of Statement I.

Statement I states that the Pahi-kashta peasants were non-resident cultivators who cultivated lands on a contractual basis. This means that they did not live on the lands they cultivated and worked under some form of agreement or contract with the landowners.

Statement II explains the reasons behind the Pahi-kashta peasants` work arrangement. It states that they were motivated by either the temptation of favorable terms of revenue or the compulsion of economic distress. This implies that the peasants were driven to work in the Pahi-kashta system due to either the attractive terms offered to them or their desperate economic situation.

Therefore, Statement II provides an explanation for why the Pahi-kashta peasants were non-resident cultivators on a contractual basis, making option 1 the correct answer.