Take tomatoes, ginger, garlic, green chili, cashews, red chili powder and water in a saucepan. Mix everything and turn the heat on medium.
Let it simmer for 10 minutes. NOTE: instead of simmering on the stove, you can use a pressure cooker (2 whistles) or an Instant pot (3 mins manual then QPR). The tomatoes should be soft and mushy. Let the mixture cool down slightly.
Transfer the mixture into the blender. Make a smooth puree.
Making Paneer Makhani:
Heat the pan or kadai on medium heat. Once hot add butter and let it melt.
Add prepared puree and mix. Simmer and cook until the gravy thickens (most of the water evaporates). The gravy may splutter a lot. If so partially cover the pan with a lid. Do stir in between to make sure that it is not sticking to the bottom of the pan.
Now add salt, Kashmiri chili powder, coriander powder and sugar. Mix and cook for a minute.
Now add water and mix. Let the gravy simmer for 5 minutes.
Then add paneer, garam masala and kasoori methi (crush between your palm before adding). Mix well. And let the curry come to a boil.
Then add heavy cream and mix.
Once the gravy starts boiling, turn off the stove and it is ready to serve.
Do not simmer for long after adding paneer. Otherwise, the paneer will get overcooked and becomes hard and chewy rubbery.
Always use ripe tomatoes. Unripe tomatoes make the gravy sour.
Use Roma tomatoes. Stay away from the beefsteaks or wine-ripe tomatoes which make sour gravy.
You can strain the tomato puree mixture after blending to get a silky, smooth gravy. I am using a high powder blender so I have not strained. Good high powder blender like Vitamix or Blendtec makes smooth puree.
Kashmiri chili powder is added just for the color. In the absence of it, you can use half amount of regular chili powder.
If using store-bought paneer then keep the paneer cubes in the warm water until you are ready to use (at least 10-15 minutes). This way paneer absorbs some water and becomes soft.
Adjust the amount of sugar, as per the tanginess of the gravy. If the tomatoes are less sour then you may need to reduce the sugar amount.