Heat 1/2 tbsp ghee/oil in a wide and deep pan. Add cubed 2 med-large onion and chopped garlic and green chilli. Cook till it browns.
Add cubed tomato and cook till it softens and becomes mushy. Check out Paneer Peas Masala
Let the onion - tomato paste cool a bit. Add 2-3 tbsp water to this and grind to a smooth paste.
In the same pan (without cleaning), add 2 tsp ghee. Add cubed 1 large onion and cubed capsicum. Cook for 4-5 mins on low flame.
Add the ground paste, mix well and add all the spice powders (Kashmiri chilli, coriander, turmeric, cumin, and garam masala) and salt. Cook for 3-4 mins, till the oil, starts appearing.
Combine 50 ml milk and 50 ml water. Add this to the curry and mix well. Check out Paneer Pepper Masala
Add Kasuri methi and sugar. mix well.
Add paneer pieces, mix well. Cover and cook on low flame for 3-5 mins, till the paneer pieces, are coated well with the masala. check to season and add more salt/sugar to balance the flavors.
Let the curry rest for 10 mins or so, for the flavors to settle in.
Notes
Though you can use oil to cook this dish, I recommend using ghee for a rich taste and flavor. The curry has a semi dry consistency and the curry tends to thicken as it rests, so adjust the qty of gravy accordingly. You can increase/reduce the qty of milk+water, to adjust the gravy consistency.If you prefer a creamier version, add 1/2 - 1 tbsp of chopped cashew nuts along with the tomatoes. If you dont like Paneer, you can use Potatoes or Mushrooms or Chicken.