Reading a text file in C#

first you do in the while:

while (sr.ReadLine() != null)

The pointer in the file moves to the next line. And then you do

line = sr.ReadLine();

so the pointer is moved again. which brings you to the while...
That declares while you think you read halve the file.

do you need to read the file line by line?
You can read it very simple according to MSDN[^]

You are actually calling StreamReader.Readline method twice (both in the while condition and in the line = sr.ReadLine; statement, but using only one of the return values).
As in the documentation[^] code sample, you may use StreamReader.Peek method to check for the End Of File condition:

while (sr.Peek() >= 0)
{
   line = sr.ReadLine();
   //..
}

The problem is that you are overwriting each result in your loop:

s = line.substring(1,4) ;

So all that you will get is the last non-blank line in the file.

Depending on what you are trying to achieve, have you looked at using:

string[] allLines = File.ReadAllLines(fileName);

Try this code.
string fileName = @"C:\NewTextDoc.txt";

string str = string.Empty;

if (File.Exists(fileName))
{
StreamReader sr = new StreamReader(fileName);
String line;

while ((line = sr.ReadLine()) != null)
{
if (line.Trim() != string.Empty)
{
s = line.substring(1,4) ;
}
}
}
else
{
s = "File does not exists";
}
return s;