I have goggled and is at a conclusion that windows 7 cannot format a drive >32GB with FAT32..I searched a lot but got results stating this limitation but none explained me the reason for this.I also came to know that linux can format it with a capacity upto 2TB(max cap FAT32 can have).My question is why windows not using the full capacity of 2TB?
This is an artificial limitation. For example, Microsoft documentation mentions that FAT32 does support a maximum capacity of 2TB for drives.
Quoting from their docs:
FAT32 provides the following enhancements over previous implementations of the FAT file system:
FAT32 supports drives up to 2 terabytes in size.
NOTE: Microsoft Windows 2000 only supports FAT32 partitions up to a size of 32 GB.
The same is true with the maximum amount of RAM memory a given version of Windows 7 will support. Reproducing the info from the Microsoft documentation, these are the artificial limitations they set:
+------------------------+-------------+--------------+
| Version |Limit on X86 | Limit on X64 |
+------------------------+-------------+--------------+
| Windows 7 Ultimate | 4 GB | 192 GB |
| Windows 7 Enterprise | 4 GB | 192 GB |
| Windows 7 Professional | 4 GB | 192 GB |
| Windows 7 Home Premium | 4 GB | 16 GB |
| Windows 7 Home Basic | 4 GB | 8 GB |
| Windows 7 Starter | 2 GB | N/A |
+------------------------+-------------+--------------+
With the exception of memory sizes for 32-bit architectures[1], there's AFAIK no real technical reason behind any of these artificial limitations. This is the result of high level business executives "creating value" for customers, if you buy into their lip service...
This is why GNU/Linux can and will format a drive to its maximum capacity without any complaints, as you found, because it won't ask you for more money and additional licenses just to do what any computer ought to be able to do out of the box w/o excuse.
[1] The 32-bit architectures do have a technical limitation in that they can only address up to 2^32 - 1 addresses, which is roughly 4GB. The memory limitations for the 64-bit architecture (and the 2GB for the x86) are the ones I'm calling "artificial".