Olfactory receptors inside the uppermost part of the nose contain special cells that help you smell. They send messages to the brain.
Here's how it works: While you're chewing, the food releases chemicals that immediately travel up into your nose. These chemicals trigger the olfactory receptors inside the nose. They work together with your taste buds to create the true flavor.
There are five basic elements of taste perception provided by taste buds on the tongue, soft palate, upper esophagus and epiglottis: salty, sour, bitter, sweet, and umami. All other aspects of taste are rendered by the olfactory system, which is accessed primarily through the nose.
So, when you hold your nose, you are blocking access to olfactory receptors which in turn prevents your brain from processing subtle and distinctive qualities of taste.