Question

In what capacity have you known or worked with the candidate

Answer 1

just take example of applicant

It is a common and somewhat ambiguous question. It usually means one or more of the following:

1) What were the circumstances in which you have known the applicant? 
For example, did you know her from work, as a friend since childhood, or as a
member of a choir or sports team?
2) What was the applicant's function or employment during your acquaintance?
For example, the applicant was one of your teachers at university, or was your piano student.