Dinesh, That is because Windows Defender is an anti-spyware program. From http://www.microsoft.com/windows/pro.../default.mspx:
Windows Defender detects and removes spyware
Windows Defender is software that helps protect your computer against pop-ups, slow performance, and security threats caused by spyware and other unwanted software by detecting and removing known spyware from your computer. Windows Defender features Real-Time Protection, a monitoring system that recommends actions against spyware when it's detected, minimizes interruptions, and helps you stay productive.
Conversely, MSE is an antivirus program which also includes the anti-spyware capabilities of Windows Defender. From http://www.microsoft.com/security_essentials/:
About Microsoft Security Essentials
Microsoft Security Essentials provides real-time protection for your home PC that guards against viruses, spyware, and other malicious software.
That is why Windows Defender is inactivated when MSE is installed.