Hi,
Income from sub-letting a house is taxable as Income from Other Sources or Profits/Gain from Business/Profession as the case may be. Since the Mother B is not carrying on any business, sub-letting Income is taxable as Income from Other Sources. She has to offer entire amount for tax as Income from Other Source. The benefit of 30% Standard Deduction is not applicable to her.
In the hands of owner A, the same is taxable as Income from House Property. He/She can claim 30% Standard Deduction and also Interest on Housing Loan, if any from the Rental Income.
It is always advisable to get a lease deed done for both original leasing (Owner A to the Tenant - Mother B without any prohibition of sub-letting) and also for sub-letting (Tenant B to sub-tenant - Grandson C). There is no such rule about 12 Years Lease for Income Tax purposes