I think the idea here would be that the GM can insist that they don't smell anything (because there's nothing to smell), but they're free to insist that they do - so they're either hallucinating, deluded, or just teasing the guy. And, really, probably not hallucinating, but deluded, yeah, if the distinction is that hallucinations are /caused/ by something (like the ergot in the rye bread that came with your standard rations - should've sprung for the iron), while delusions are self-imposed.Suppose that the players play their PCs as keeping their distance from the chamberlain, opening windows when he enters the room, etc - because the players have decided that their PCs think the chamberlain smells - while the GM, exercising his/her power to describe the environment, insists that the chamberlain doesn't smell. Whose view prevails? What is true in the fiction - does the chamberlain smell? are the PCs hallucinating? can the GM insist that the PCs in fact don't think the chamberlain smells?
The idea that each can have absolute authority over a domain - PC beliefs/feelings; the rest of the gameworld - with no possibility of contradiction isn't tenable, in my view.
There's a bit of a traditional double-standard at play, here. OT1H, you have the ideal of Gygaxian skilled play, in which knowing that trolls can't regenerate fire damage and thus having your PC who's never seen or heard of them make with the flaming oil he's never used that way before, is just smart play - "challenging the player" to tie it back. OTOH, you have the contrary ideal that you should never use 'player knowledge' (these day we'd say "no metagaming!"), in which case you only use the knowledge the character should have - "challenging the character."This seems straight out of the Gygaxian playbook. I don't think it suits a game in which the player wants to play a PC who is embedded in the gameworld rather than a relative stranger to it.
Both are pretty old-school, in spite of being inherently contradictory. The game was played very differently by different folks and/or at different times back then.