Windows 8 installation calls for a 350MB system reserved partition, while in Windows 7 installation, there is only 100mb, so the upgrade fails because of lacking in system partition.
Since the default System reserved partition cannot be extended, creating a new system volume is the workaround. Here are the steps to move the system volume to any other volume:
1. Choose where you want to have your system volume. Few things you need to keep in mind:
a. System volume can only be created on a primary partition of MBR disk.
b. If system volume & boot volume are together, then BitLocker feature cannot be used to encrypt volumes on your machine.
2. Suggest creating a new volume (say F:) on the same disk that contains the boot partition of size of about 490 MB (be careful to keep it less than 500 MB).
3. From an elevated command-prompt run: bcdboot.exe /s C:\Windows /s F:.
4. From elevated command-prompt run: DISKPART
5. From the disk part command-prompt:
DISKPART> select volume F
DISKPART> active
Regards