The real intention of the British to include the princely states in the Federal Union proposed by the Indian Act of 1935 was to-
Finally effect the complete and administrative take – over of all the princely states by the British
The act proposed that federation of India could come into existence only if as many princely states (which had been given option to join or not to join) were entitled to one half of the states seats in the upper house of the federal legislature. The parts of the Act intended to establish the Federation of India never came into operation, due to opposition from rulers of the princely states. The remaining parts of the Act came into force in 1937, when the first elections under the Act were also held.
At the time of handing over the reins to India, British had given the option to princely states to either Join India or Pakistan or remain Independent. Many ruler of Princely States were of the view that their power would be diminished if they joined any of the two countries, hence they preferred to remain non-aligned. However it was due to Patel that the Balkanization of India was avoided as he convinced these princely states that managing a small state without dependence on a big country like India would be very difficult for them, financially as well as operationally. The only state which could not be included is Jammu & Kashmir, which is the Bone of Contention for the Two Countries ( India and Pakistan) even after 65 years of its Partition.