I quote some material of interest here:
Prof Abdul Waheed Siddiqui has counted 90 speeches made by Jinnah between 1940 and 1947 in which he spoke of an Islamic State. Be as that may, these differences over an Islamic State have been documented, by the Raja of Mahmudabad himself, Mirza Abul Hasan Ispahani, Abdur Rahman Siddiqui through Qurrat ul Ain Hyder. However, only one version advances the reasons behind Jinnah's objection, the unpublished autobiography of Isha'at Habibullah.and
The Raja started off by saying that since the Lahore resolution had been passed earlier that year, if and when Pakistan was formed, it was undoubtedly to be an Islamic State with the Sunna and Shariah as its bedrock. The Quaid's face went red and he turned to ask Raja whether he had taken leave of his senses. Mr. Jinnah added: `Did you realize that there are over seventy sects and differences of opinion regarding the Islamic faith, and if what the Raja was suggesting was to be followed, the consequences would be a struggle of religious opinion from the very inception of the State leading to its very dissolution. Mr. Jinnah banged his hands on the table and said: We shall not be an Islamic State but a Liberal Democratic Muslim State.
On the other hand, what Isha'at Habibullah recalls, reveals that Jinnah's objection to an Islamic State was not ideological but practical, even historical. There is one ideological strand on which Jinnah and Mahmudabad were in agreement and that was Islamic Socialism. Apart from having a long Middle East pedigree, this concept had its origin in the so called fundamentalist circle with Syed Qutb and Mustafa al Sibai at its head. Syed Qutb had said in 1948 that Islamic Socialism avoided both the pitfalls of Christianity's separation of religion and society and those of communist atheism. The Quaid-i-Azam mentioned it as an ideal in Chittagong on 26 March 1948, Liaquat Ali Khan said in Lahore on 3rd September 1949. "For us there is only one 'ism' - Islamic Socialism". Fatimah Jinnah stated in Karachi in February 1951 that Islamic Socialism did not allow any class struggle. The Raja of Mahmudabad in Karachi in Katrak Hall in 1967 argued cogently in favour of Islamic Socialism. All these are Muslim League stalwarts, so the question which arises is how is it possible for people to disagree on an Islamic State but agree on Islamic Socialism? The Holy Quran 68:7-14 specifies the types of people who should not be obeyed, it does not proscribe any political system. On the other side, strictures against economic crimes are clear and manifest: Usury, hoarding, gambling, cheating in weights and measures. It is on avoidance of these ills that societies' pillars have to be raised. What structure is to be based on these pillars is again left to society.