ATmega16HVA features on-chip debugging via debugWIRE interface, with either JTAGICEmkII or AVR Dragon. To enable debugging the capacitor (C10) on the reset line needs to be removed, as this stabilization of the Reset pin prevents communication through debugWIRE.
Figure 1. Debugwire capacitor
Notice that debugWIRE must be enabled via the ISP interface if not enabled, and disabled after debugging to enable ISP again. This is described in Atmel Studio help. Leaving the ATmega16HVA with DWEN-fuse on will increase current consumption.