When an Amazon SageMaker notebook instance needs to access encrypted data in Amazon S3, the ML specialist must ensure that both Amazon S3 access permissions and AWS Key Management Service (KMS) decryption permissions are properly configured. The dataset in this scenario is stored with server-side encryption using an AWS KMS key (SSE-KMS), so the following steps are necessary:

S3 Read Permissions: Attach an IAM role to the SageMaker notebook instance with permissions that allow the s3:GetObject action for the specific S3 bucket storing the data. This will allow the notebook instance to read data from Amazon S3.

KMS Key Policy Permissions: Grant permissions in the KMS key policy to the IAM role assigned to the SageMaker notebook instance. This allows SageMaker to use the KMS key to decrypt data in the S3 bucket.

These steps ensure the SageMaker notebook instance can access the encrypted data stored in S3. The AWS documentation emphasizes that to access SSE-KMS encrypted data, the SageMaker notebook requires appropriate permissions in both the S3 bucket policy and the KMS key policy, making Option C the correct and secure approach.