Hey,
You can think of the putty acting like the way bullet does.
The putty(like the bullet) collides and gets stuck on the block.
During the collision the forces acting on block are the force of tension, gravity and the force exerted by putty,(lets call it N).
(NOTE:It's a STRING.Not a SPRING. You are thinking of it as a SPRING).
The forces acting on putty is the force of gravity and the reaction force exerted by block (-N).
Strictly speaking external forces of tension and gravity act on system (block +putty) so momentum is not conserved. However, the impulse caused by these forces is v small in comparison to the impulse caused by N, so from practical point of view momentum is nearly conserved .(The difference in result is of negligible order).
Now, the putty gets stuck on block.What is the new velocity of system containing block and putty.
Was this collision elastic, partially elastic or completely inelastic?
What happens to mechanical energy after this type of collision ? Does it increase, decrease or remain constant?
(Your view that energy is conserved in inelastic collision is wrong.It's the other way round as the above post suggests)
What is the the new kientic energy of the system?
Remember, as soon as the block amd putty start moving upwards (after the collision) tension in string vanishes (WHY?)
So you can conserve mechanical energy during the course of journey after the collision.(Why?)
This will help you calculate the maximum height attained.
Hope this helps.