Efficient and dynamic traffic management is an integral part of any smart city. Finding the shortest route considering congestion in real-time and managing traffic signals determine the efficiency of overall traffic flow. Route planning within a dynamic traffic environment remains an open challenge due to some essential unaddressed issues. Specially, considering priority vehicles to provide better traffic flow. For example, the routes of the vehicles need to be derived in such a way that higher priority vehicles like ambulances, police cars, etc. are provided efficient routes and green signals as per their given priority. To establish the solution we need to consider two factors. Vehicle rerouting to obtain shorter path and traffic signal optimization for lesser waiting time by a vehicle on a traffic signal. Existing works don't consider both factors in their work and tried to solve the issue reactively; upon request for clearance by a vehicle on a particular traffic signal. The proposed work seems to be a proactive approach that considers both factors. In this work, a dynamic real-time traffic environment with prioritized vehicles is modeled as a bi-level optimization problem. The solution ensures that the routes are offered to the vehicles in a way such that the unit travel time of a vehicle with higher priority must be less compared to vehicles with lesser priority. In addition, the traffic signal settings are optimized in a coordinated way to achieve the above-mentioned goal. Rigorous experimentation is done for validation of the proposed solution. Several traffic situations consisting of inherent dynamism are simulated through SUMO and the experimental findings substantiate our claims in terms of various traffic metrics.