I was at a big Mall here in Abu Dhabi, and there was pretty fancy typically nice Apply shop/store here, with usual Macs and MBs on display. There was this one Macbook, running windows XP!!! I was pretty shocked to see a windows xp, asked one of the guys there and he said there are a lot of ppl who are ready to buy these but they want windows xp running on it, so we have this for them now.

I didnt know that officially this happens, was there something wrong with that shop or Apple does this everywhere?

I can maybe get you guys a pic if anyone needs it

umm this was supposed to goto Off topic ...

Is it legal yes, can they do it yes, windows doesn't limit what hardware you run windows on if you buy a copy of it.

from windows point of view yes, but does Apple allow there laptops to be sold with windows software?

Apple doesn't limit what runs on their hardware, they just limit what hardware runs their software.

Apple provides Bootcamp, which allows you to boot Windows natively on any recent Mac. Apple has nothing to do with what was described in the OP; the shop is the only one doing it -- the techies sell a laptop that has both OSX and XP installed on it.