Electronic – AVR – strange communication between ATmega8A and bluetooth module

I'm using ATmega8A-PU AVR microcontroller, and HC-05 bluetooth module on a breadboard.

What I'm doing here, is to connect to BT module from my mobile phone and toggle the LED state by sending commands to the microcontroller.

But the problem is, as I send a character to the microcontroller through BT module, I won't receive the same character and LED won't toggle.

I connected BT module and LED to the microcontroller by the following schematics:

What I did here:

1. connected VCC & GND pins properly.
2. connected TX pin of BT module to RX pin of the microcontroller.
3. dropped the voltage of TX pin of the microcontroller from +5v down to +3.3v , and connected that to RX pin of BT module (voltage division technique V2 = R2 x V1 / (R1+R2)) as this pin operates on 3.3v only.
4. connected a 5mm LED to pin PB0 of the microcontroller.

So I guess the hardware part is properly set and there's no problem in here as BT module and LED both work perfectly.

I compile my programs on Linux, Ubuntu 16.04 platform by avr-gcc compiler.
I also use an USBasp AVR programmer to upload hex files into the microcontroller.

I set the BT module baud rate equal to the microcontroller's, so that they can talk to each other at the same frequency.
ATmega8A default baud rate is 9600.
BT module baud rate is 38400 by default, but to make it work with the microcontroller, I set it to 9600 by AT commands (AT+UART=9600,0,0) using Arduino platform. (maybe this causes the problem I'm going to explain).

I should note that, I can't set the microcontroller's baud rate to 38400, as the compiler warns that baud rate is higher than allowed. that's why I changed the BT module baud rate instead.

Finally, I compiled following code and uploaded it to the microcontroller:

#define F_CPU 1000000UL
#define FOSC 1843200 // Clock Speed
#define BAUD 9600
#define MYUBRR FOSC/16/BAUD-1

#define bitset(bit) (1 << (bit))
#define is_set(sfr, port) (((sfr) & bitset((port))))
#define is_dead(sfr, port) (!is_set((sfr),(port)))
#define wait_to_set(sfr, port) do {} while (is_dead((sfr),(port)))
#define wait_to_die(sfr, port) do {} while (is_set((sfr),(port)))

#include <avr/io.h>
#include <util/setbaud.h>

void USART_Init (const uint8_t ubrr)
{
    UCSRA |= (1 << U2X);
    UCSRB = (1<<RXEN)|(1<<TXEN);
    UCSRC = (1<<URSEL)|(1<<USBS)|(3<<UCSZ0);
    UBRRH = (ubrr>>8);
    UBRRL = ubrr;
}

void USART_Flush ()
{
    unsigned char dummy;
    while ( UCSRA & (1<<RXC) )
        dummy += UDR;
}

void USART_Transmit (const unsigned char data)
{
    /* Wait for empty transmit buffer */
    while ( !( UCSRA & (1<<UDRE)) );
    /* Put data into buffer, sends the data */
    UDR = data;
}

uint8_t USART_Receive ()
{
    /* Wait for data to be received */
    while ( !(UCSRA & (1<<RXC)) );
    /* Get and return received data from buffer */
    return UDR;
}

inline void LED_poweron () {
    PORTB |= (1<<PB0);
}

inline void LED_poweroff () {
    PORTB &= ~(1<<PB0);
}

int main ()
{
    USART_Init(MYUBRR); // setup serial connection
    DDRB = 0xff; // setup LED DDR
    PORTB = 0; // power off LED at the beginning

    while (1) {
        const uint8_t byte = USART_Receive (); // receive data
        USART_Flush (); // flush UDR to drop useless data

        if (byte == 2)
            LED_poweron ();
        else if (byte == 1)
            LED_poweroff ();

        USART_Transmit (byte); // send data back to sender
    }

    return 0;
}

The code is simple.
it initializes serial connection and receives data from BT module. if data holds number 2, LED would power on, if it holds number 1, LED would power off and any other value would be ignored, and finally the value transmits back into the sender.

I compile and upload this code by the following commands:

avr-gcc -Os -Wall -mmcu=atmega8a -o serial.o serial.c
avr-objcopy -j.text serial.o serial.hex 2> /dev/null
avrdude -p m8 -c usbasp -b 9600 -U flash:w:serial.hex

The code uploads properly and no error will pop up.

avrdude: warning: cannot set sck period. please check for usbasp firmware update.
avrdude: AVR device initialized and ready to accept instructions

Reading | ################################################## | 100% 0.01s

avrdude: Device signature = 0x1e9307 (probably m8)
avrdude: NOTE: "flash" memory has been specified, an erase cycle will be performed
        To disable this feature, specify the -D option.
avrdude: erasing chip
avrdude: warning: cannot set sck period. please check for usbasp firmware update.
avrdude: reading input file "serial.hex"
avrdude: input file serial.hex auto detected as ELF
avrdude: writing flash (146 bytes):

Writing | ################################################## | 100% 0.12s

avrdude: 146 bytes of flash written
avrdude: verifying flash memory against serial.hex:
avrdude: load data flash data from input file serial.hex:
avrdude: input file serial.hex auto detected as ELF
avrdude: input file serial.hex contains 146 bytes
avrdude: reading on-chip flash data:

Reading | ################################################## | 100% 0.11s

avrdude: verifying ...
avrdude: 146 bytes of flash verified

avrdude: safemode: Fuses OK (E:FF, H:D9, L:E1)

avrdude done.  Thank you.

I use Serial Bluetooth Terminal Android application to connect to the BT module from my phone.

The problem occurs just here, when I send a string to the BT module, it sends back non-ascii characters and LED won't toggle!

The odd part is, I realized that when USART_Receive function happens to receive 1 byte, it iterates 4 times and receives 4 bytes instead!
I found this by setting the LED to blink for each time that function receives a byte.

I explained everything in detail, so any idea why am I not receiving the same character that I'm sending to BT module?
Is it about the timing? baud rates badly set?
I have no idea what's going on!

EDIT: you can find this project here