On July 22, Lord Wavell resumed his effort to form an Interim Government and wrote to Nehru and the Quaid proposing a Cabinet of fourteen members, six to be nominated by the Congress (including one scheduled Caste representative), five by the Muslim League, and three representatives of minorities, who were to be nominated by the Viceroy. The Quaid sent his reply on July 31. He pointed out many ways in which the present proposal was detrimental to the Muslim League as compared with the original proposal for the formation of the interim government and concluded that there was no chance of the Muslim League Working Committee accepting it.

Upon receiving reply, the Viceroy sent for Nehru, but not for the Quaid, to have a personal discussion. On August 6, with the concurrence of the British Government, he invited Nehru to form the interim government, leaving it to him to consider whether he should first discuss the proposals for the formation of the government with Quaid-i-Azam. To the Quaid, the Viceroy wrote that he had decided to invite the Congress to make proposals for an interim government and hoped that the Muslim League would join if the Congress made a reasonable offer of a coalition.

This is how the Interim Government was installed in office on the appointed date, 2 September, 1946. The Congress became jubilant. Hindu leaders remarked that “within the next few days India will have a National Government. Muslim League may come or not … that would make no difference. The caravan will move on --- we must now consider ourselves rulers of this land”.

The whole of Muslim India and several observers in Britain regretted the installation of a one-party government in India at this grave moment. Quaid-i-Azam issued a strongly worded statement on 25 August. He regretted the Viceroy’s decision which, he said, “was inconsistent with his earlier assurances to the Muslim League and with his pervious commitments”. On the day the new Government took office, the Muslims, throughout India, flew black flags on their houses and shops. Thereafter, as a result of persuation of the Viceroy, the League also joined the Interim Government with the sole aim to protect the rights of Muslim India. The Muslim League realized that its exclusion from the Interim Government was playing havoc with the Muslim interests. The Quaid was now of the opinion that he could fight the battle for Pakistan better if his Party was inside the coalition than outside. He, therefore, decided to enter the Government.

The Muslim League entered the Interim Government against the wishes of the Congress. The conditions of possible cooperation had been destroyed by the Congress leadership through its claims to a monopoly of patriotism, and its continual efforts to break the will and to kill the self-respect of any other organization.

League Congress confrontation in the Interim Government

It was an uneasy partnership from the very start, and confrontation began over the allocation of portfolios. The Viceroy had promised an equitable distribution of major portfolios and had “urged that one of the three senior portfolios viz., External Affairs, Defence and Home Affairs be transferred to the Muslim League.

Nehru refused on the specious grounds that this would have an unsettling effect on the country. In the face of Wavell’s persistence, he threatened to resign. The Congress leaders hit upon the idea of offering the Finance Portfolio to the Muslim League. It was argued that because of the technical nature of the subject, the League would refuse the offer. If this happened, the Congress would lose nothing. If on the other hand the League nominee accepted the Finance portfolio, he would soon make a fool of himself. Either way Congress would stand to gain. With these noble sentiments, Patel agreed and the proposal won his strong support. The Viceroy was informed that the Congress would offer Finance to the Muslim League. The Proposal was accepted and Nawabzada Liaquat Ali Khan became Finance Minister. The Congress, while full of mistrust and hostility towards the League, wanted Nehru to be recognized as the leader of the entire Cabinet. This, the League refused to accept. At a press conference, Liaquat Ali Khan made it clear that Nehru was "nobody else’s leader except of the Congress bloc in the Government”.

The bitter experience of even the short period of six months made the idea of a joint Hindu-Muslim Cabinet stink for many Congress leaders who had all along fought for an undivided Indian Dominion. The creation of Pakistan now appeared to them to be the only way of deliverance from anarchy and bloodshed caused by chaos, confusion and a complete breakdown of administration.

So far as Patel was concerned, his experience of working with the League members in the Executive Council had convinced him that the Pakistan mentality was so strong among the Muslims that it was impossible to work with the Muslim League. At last the naked truth dawned upon him, and he said; "Whether we liked it or not, there were two nations in India". He was now convinced that "Muslims and Hindus could not be united into one nation. There was no alternative except to recognize this fact." The Two Nation Theory was thus accepted by the Hindu opponents.