That is how it is done, schematics are not really correct, otherwise the PIC would not even be working.
LM35 is directly connected, what do you mean a 0.1uF from ADC input to ground?
Power supply is 12V 300mA, then it goes thro a Diode and then to a 5Vregulator.
The LM35 is connected directly to the 12V and shares the same GROUND as all connections, with a voltmeter it outputs the correct value, right now it outputs 0.23V for 23Cº, but Red led is not ON while in Proteus it is.
I updated the first post diagram to something similar to what I have in my circuit.