It’s くさい. Citation: (a) it’s what they use in the anime, and (b) it just feels more right. Also, it’s not 煙の臭い it’s 煙臭い, and only the くさい is used as a suffix.
A thread about the difference between the two readings actually came up last month, and resulted in a tweak to the WaniKani vocabulary card to ensure you don’t get penalised for the wrong reading. Linky.