Question

Opens the given file name in read mode
and returns an iterator function that,
each time it is called,
returns a new line from the file.
Therefore, the construction

 for line in io.lines(filename) do body end

will iterate over all lines of the file.
When the iterator function detects the end of file,
it returns nil (to finish the loop) and automatically closes the file.

The call io.lines() (without a file name) is equivalent
to io.input():lines();
that is, it iterates over the lines of the default input file.
In this case it does not close the file when the loop ends.