This is inside the loop of (inc_{new}, exc_{new}), over the two sides of the split (one with ancestors of the split added to inc, one with descendants of the split added to exc). The logic indeed tries to extend inc_{new} after adding ancestors of the split to it as much as possible, but that cannot be guaranteed to be the end of the line for this work item.
Aside, there is no point in analysing this algorithm anymore. The GGT min-cut based algorithm later in this thread, and the SFL algorithm in the other thread, are far more efficient.