Answer is B.
Suppose, 100 litres of milk costs Rs.100, 100 litres of milk is sold at 25% profit, so he would have sold it for Rs.125.
As water doesn't have any cost, water added by him will be 125 – 100 = 25 litres [1 litre milk cost Rs.1].
100 litres of milk and 25 litres of water added, so mixture now became 125 litres.
The percentage of water in the mixture is $\frac{25}{125} * 100 = 20$%