Why doesn't iTunes allow me to reset my Music library?
1) Close iTunes, unplug phone
2) iphone: Settings > Music > TURN OFF "iCloud Music Library" | there is no manual editing possible with this turned on
3) Connect phone, open iTunes
4) itunes: Phone > Overview bottom lane (see your screenshot) "Manually manage videos" changes to "Manually manage music and videos" : activate it - you should be able to manually manage your music now.

more details on https://support.apple.com/en-us/HT201593