Andy_Cool:
The max current sink capacity for the Digital Pin of Atmega8 is 40 mA?
What is the source capacity?
Also 40mA.
Andy_Cool:
Considering the above image, will it work without any problem?
How many Ohms resistor should I use on each pin?
That depends a little on your LEDs. Look up the forward voltage of the LED from its datasheet, also the maximum forward current. The decide on the forward current you want to use per LED. The absolute maximum is 20mA each because you are driving 2 of them from a single pin. Subtract the forward voltage from 5V, divide by the required forward current (Ohm's law), and that gives you the resistance.
Andy_Cool:
Lastly, I would be grateful if you can tell me how to use NPN tansistors (BC548)
as switches in the above diagram? (including the resistor values)
See <b>Electronics Components: Use a Transistor as a Switch</b> - dummies. If you want to switch the positive supplied to the LEDs, you need PNP transistors. The BC548 is only suited to switching low currents. BC337 is better for switching medium currents.