The argument is saying that because T house is the most famous in the district, and the district is the most famous in the city, T house must be the most famous in the city.
Let's compare it to (E) and (C).
(C) says S is the oldest child in her family. Each of the children in the family are older than any other child in the building. Hence S is the oldest child in the building.
This is a valid argument, she is the oldest among the kids that are all older than any other kid in the building, so it is a proper inference to conclude that she is the oldest overall.
(E) roses are the most beautiful in the university garden. University garden is the most beautiful in the region. Hence, roses are the most beautiful in the region.
This flawed logic parallels the stimulus exactly, and is thus the correct answer choice.