Prepare Gravy: In a handi, heat oil and sauté dry Kashmiri red chillies, garlic for a minute. Add onions, ginger garlic paste until onions are translucent. Add tomatoes, salt, sugar, degi red chili powder, turmeric powder, water, and cook for 5-6 minutes. Add coriander powder, cashew nuts, butter, cover, and cook for 10-12 minutes. Let it cool, then grind into a smooth paste.
Prepare Kadai Masala: Dry roast black peppercorns, coriander seeds, cumin seeds, fennel seeds, and salt until aromatic. Grind with chilli flakes into a coarse paste.
Marinate Paneer: Mix paneer with salt and a pinch of degi red chili powder. Set aside to marinate.
Fry Paneer: In a pan, heat oil and fry marinated paneer until golden. Set aside on an absorbent sheet.
Sauté Vegetables: In a pan, heat oil and sauté onions, capsicum, yellow and red bell peppers with salt. Add tomatoes, butter, degi red chili powder, and prepared kadai masala. Toss for a minute on high flames.
Prepare Kadai Paneer: In a kadai, melt butter, add onions, prepared gravy, degi red chili powder, water, and simmer for 7-8 minutes. Add fried paneer, sautéed vegetables, prepared kadai masala, fresh coriander leaves, ginger, lemon juice, and mix well. Garnish with coriander sprig.