I was crossing Donny zone the other day and my Tranny was indicating 4,000 when I was at 3,000
It's perfectly possible for your transmitted altitude and actual altitude to differ significantly.
Mode C and Mode S transponders always send altitudes relative to QNE (1013.2 hPa) whereas at that height you will (hopefully) have had your altimeter set to QNH or QFE.
Even an encoding alt depends on having the right QFE set.
No - see above. What
you see will depend on your baro setting. What the encoder sends to ATC doesn't (though the controller will see the correct altitude because the ATC computer will adjust it for the known QNH).