Hi,
I am trying to add a user on a server that can only run telnet command and cannot run any other command that by default a normal user on linux is able to run. Is that possible???

Possible? Yes, and totally pointless. The telnet client can invoke a sub-shell, which will then be able to run other commands. The only good way to do this is to set the users login shell to be /bin/telnet (or wherever you keep telnet on your system), but see previous comment. And in order to invoke sudo, you must first log in to a shell, which will NEED to run other commands in order to log in.

What is your goal? What are you trying to accomplish? Version/distro of Linux? And WHY, in 2014 are you even CONSIDERING using telnet??? Telnet was old and insecure ten years ago...it hasn't improved.