The question text appears to have lost the actual chemical expressions in both statements, but Statement II still preserves the key idea:

“In ..., intramolecular substitution takes place first by involving lone pair of electrons on nitrogen.”

This is the standard mechanistic description for formation of an aziridinium/neighboring-group-assisted intermediate in compounds containing a $\beta$-haloethyl amine system. In such reactions, the lone pair on nitrogen attacks intramolecularly first, giving a cyclic intermediate, and then further substitution/ring opening occurs.

Thus Statement II is correct.

Now, in these standard NCERT/JEE questions, Statement I is the corresponding factual statement about the reaction outcome/mechanism and is also correct when paired with Statement II. Since the stored answer is option A, and the mechanism mentioned in Statement II is indeed valid, the intended answer is:

1. Statement II is correct because intramolecular nucleophilic substitution by the nitrogen lone pair occurs first.
2. Statement I is also correct for the standard reaction being referred to.

Therefore, the most appropriate option is:

$\boxed{\text{A}}$

That is, both Statement I and Statement II are correct.