There is a lot going on here. I honestly think you need to dust off your wrenches. As stated before, if you rely on a mechanic to keep a CRD running you'll end up minus one CRD and a significantly lighter wallet. Regardless of the condition of the bottom end, if it was expelling exhaust through the intake tract, it was timed wrong. Your mechanic can say "but, but, but" all day long and it will never change that fact. It was likely done wrong by someone who is used to timing more conventional diesel motors and thought they could just slap it together and go. I would be willing to bet this is the majority of your problem. I would not be the least bit surprised if your intake was, in fact, full of sludge. Not so much peanut butter, but more like creosote in a chimney if you've ever had the experience. This is common in vehicles that have had the EGR enabled for extended periods. It can be fixed with a simple bath in a tub full of diesel and a little elbow grease. Being a diesel, everything in the motor is ALWAYS going to have a "glaze" of soot-laden oil. Par for the course.
Regarding the knock. You said it has had it since the previous shop replaced the turbo over 40k ago? Explain this knock a little better if you can. If your turbo blew all the oil out the exhaust and left you with a spun bearing(s) on the crank, then yes, you're S.O.L. with your current block. This is something you may or may not be able to confirm if you decide to tear it down to the cylinders at some point but that is for later discussion. The knock could be a noise caused by poor timing and mistaken for a typical lower end knock. Right now it is worth getting it timed correctly and seeing if it runs. I would suggest taking the intake off completely and making sure the rockers are still in good shape and seated correctly with assembly grease before re-assembling. You can inspect the valve stems at this point to make sure they are all in-line with each other. This is also a good time to borrow/buy a bore-scope and take a peek at the top of the pistons thru the injector holes. Make sure there are no signs of valve-contact (dents, dings, scrapes etc). Follow the procedure for timing the CRD with a new belt and see what happens when you fire it up!
Start with this video and follow the next ones all the way up until part 4...
https://www.youtube.com/watch?reload=9&v=5o_FJpBEKjk