Node.js server is works on event based models where callback functions are supported. But I am not able to understand how is it better than traditional thread based servers
Threads are relatively heavy-weight objects that have a resource footprint extending all the way into the kernel. When you park a thread in a blocking syscall or on a mutex or condition variable, you are tying up all those resources but doing nothing. Now the OS has to find more resources so your program can create another thread... Then you idle them too. It doesn't take long before the OS is struggling to scavenge more resources for your program to waste.
CPU time is just one small part of he bigger picture. :-)