"When people are happy, they tend to give____interpretations of events they witness: the eye of the beholder is ____by the emotions of beholder."

Meaning: When ppl are happy they give different interpretations of events they witness. So the eye of the beholder is influenced by the emotions of the beholder.
A- Charitable here means judging favorably. Works well with our context. Correct.
B- Elaborate means complicated. Okay but this doesn't make sense w.r.t. to the emotions bit.
C- Coherent means logical. Opposite to what we want.
D- Confused means chaotic. Irrelevant here.
E- Sharpened means improved. Opposite to what we want.
F- Coloured here means imbued with emotions. Perfect fit.

Also the option tab is incorrect. Should be multiple choice. Moderators please correct. @carcass

quite confusing to say the least. Elaborate can mean different things, and so can charitable. I found it really convoluted.
Can we expect such twisted questions during our GRE?

that is just one of the less tricky questions you're gonna have to have in real GRE. Believe me.