This works to rebalance the channel, but it does not add any funds to it. There is still only 1 BTC in the channel. The funds from the on-chain transaction goes into Bob's personal Bitcoin wallet, and is not on the lightning network. It does nothing to increase the size of the channel.
This technique may prove to be useful to prevent channels from becoming unbalanced, so I don't mean to imply that this is not useful. It is also important to note that a similar technique could work by using an alternate lightning route from Alice to bob