Hi Akhil,
During the Dunning Proposal itself, the dunning procedure and the dunning level are determined.
Dunning activity only triggers the action which is assigned to the dunning level, say reminder notices, SMS etc. in the Configuration FPL9
So in your scenario, if the dunning level is not getting updated\incremented, then the issue is at the proposal level than at the activity level.
Check the Dunning proposal run first and I think you will get the error in there.
Hope it helps...
Thanks,
Amlan