Rinse the paneer in water twice and soak it in hot water for at least 15 to 20 minutes. Soaking in hot water will make the paneer super soft.
Dry roast the ingredients mentioned in the 'Masala powder' on medium flame till aromatic.
Cool the spice mix and grind to a slightly coarse powder
Cut the bell peppers in cubes after removing all the seeds in cut. Similarly cube the onions (1 medium size) and separate all the onion layers. In a kadai, add 2 tablespoon oil and on high flame sauté the onion cubes for 2 minutes. Add the bell pepper cubes as well and sauté for another 2 to 3 minutes. Do not overcook the bell peppers and onions, as they must remain crunchy.
Now add some salt and around tablespoon of the roasted ground masala and toss. Transfer the onions and bell peppers to a plate and keep aside.
Clean wipe the kadai and add 2 more tablespoons of oil and add chopped ginger and garlic. Then add 1 large onion roughly chopped and cook till the onions turn pink in colour. Now add 3 chopped tomatoes and some salt and cover and cook till it is soft and mushy.
Blend the onion and tomatoes to a smooth paste after cooling the mixture
Heat 1 teaspoon oil in a kadai and then in a low flame, add 2 tablespoons of butter. Add 2 bay leaves and turmeric powder and kashmiri red chilli powder. Then add the onion and tomato paste and little water and mix well and let it come to a gentle boil.
Now add the remaining ground masala, salt to taste and 2 teaspoon crushed kasuri methi and cook for another couple of minutes.
Next add some milk or fresh cream (this is optional), but gives the gravy a rich taste. Mix well. Add chopped paneer and cook for 2 to 3 minutes.
Finally add the fried bell peppers and half teaspoon honey (optional) and mix and cook for just a minute more. If the bell peppers are cooked for long, they will not remain crunchy. Serve hot with roti, naan or rice.