Hi Vijay, welcome to NST.
The XP setup program, on the screeen where you are trying to allocate the space to install the OS, should have a "format" button, which will take you to another screen where you can let XP format the space itself.
Disconnect W7 temporarily while you install XP from the booted XP CD, otherwise XP will regress the W7 boot process.
Reconnect W7 as first HDD in the BIOS boot sequence after the XP install has finished, Install
EasyBCD 2.0 latest build on W7 and use it to add an XP entry to the W7 BCD. Accept the offer to auto-configure XP and don't change anything.