I personally prefer ATC to specify that a flight is xxx ft above/below and add "unverified" if that is what it is.
The reason being that it saves me having to compare my height and work out the difference..........much simpler to think 3000ft above...not a problem, 300ft above....eyes on stalks.
Yes one can'e be sure of unverified transponder mode C. However, airworthiness requirements keep an eye on the accuracy of mode C and hand on heart, I can only think of 1 case of a mode C being out of limits in the last 25 years.....and that one was 30,000ft out!
As to the problem of a mode C error causing the aircraft to be above when it is indicated as being below, considder the following;
You point traffic out as same level 12 O'Clock.........I will not always see that aircraft in my 12 O'Clock. It can be in either my 10 O'Clock or my 2 O'Clock depending on my TAS and the Wind. The reason being that you see my track and I see my heading when I look out and with a strong wind and slow aircraft there can be 30 deg difference..........but do ATC warn us that the clock may be slow?
Regards,
DFC