Sorry guys. I have been down with fever. Still not recovered.
To answer some of the questions:
1. It is not refurb
2. It is bought from Amazon(reputation

)
3. I changed the cable box from the one having only component outputs and sending 480p only to the one having HDMI and goes upto 1080p.
4. There are 2 issues now with the setup.
a) The issue I explained about the blue screen (happens when there is bright light example in ads).
b) The other issue cropped up with new cable box is, it displays the picture only at the center i.e. there are black bands on both sides. I change the settings on the cable box to make it display the full picture but a restart switches it back to smaller display area.
My TV is 720p LCD and is set as 16:9 in both cable box and receiver.
Receiver resolution is "Through".
Should I go back to a receiver like Yamaha that does not do upscaling?
The answer to the simple setup-
When I use component from Cable Box to TV or HDMI from cable box to TV, the problem of smaller viewing area comes. I hate Component because that needs a separate coax or digital cable for sound. For me the simpler setup would be 1 HDMI cable from cable box to receiver and receiver to TV.