Well, I had this issue and it annoyed me a lot.
The Issue was very easy to comprehend. There is something wrong with the Alpha!
But the Solution? For a newbie I thought the issue was in the DDS Texture. The texture raised suspicion because I had just blindly selected the ARGB 1 bit alpha.
So the doubt was:
1) Is the texture flawed?
2) Is there something missing in the Code?
And yeah, There was something missing in the code indeed. The texture generated from NVIDIA Texture tools were correct.
Here is the Final Output:
So what did the Magic? It was: BlendingState (ID3D11BlendState) which needed to be set on how Layers of the TileObject are Blending with the each other.
This Gist explains the 3 files that I changed to add Blending for Alpha.