HELP & Advise on home automation system....

This request looks pretty hopeless .... But let's try.

Yes, an ATMega with Arduino bootloader can without any problem monitor a Reed switch on a window and blink an IR led to notify a receiver about events.
No, an ATMega with Arduino bootloader cannot run a full featured webinterface for controlling, flexible rule sets and such.
An there are quite a lot more than 50 shades of grey in between.

What are your commonents?
How are they supposed to communicate?
The choice of controllers comes far behind this.