I am in agreement with you. I hate to drive a machine that is not 100% good. It is lucky that you opened the engine before more damage could have taken place. This peek inside showed you the handiwork of the previous mechanic (that is why I have done all the work on my project myself).
Lighter pitons do not necessarily mean higher performance. Pistons/con rods/crank assembly is dynamically balanced at the factory. The counter weight is drilled to reduce weight ensuring that the assembly is balanced. If you go for lighter/heavier pistons, you will disturb this dynamic balance and that will result in nasty vibrations. That is what was wrong with my Triumph. Someone had replaced the pistons making it very nasty to ride and I could never get it to run well. If your engine was basically good before you began, then you are 90% there to a successful rebuild. Your plan about the rings is good. Just make sure that the Alto 1000cc car has same size cylinder bore as the CB350 also fix the rings in the pistons and check the ring/grove gap. About 0.002" to 0.003" (0.05 - 0.08mm) should be OK. If the Alto bore is not EXACTLY the came size as your CB350, your engine WILL smoke.
Read this for general interest: cb350 piston/cylinder clearance - page 1 - HELP! 1-800-CAFE-HELP - DO THE TON
Also this hondatwins.net • View topic - Piston ring order, in general
What about the valve guides? bad valve guides/seals will result in a smoking engine too.
Regards