Butter chicken — murgh makhani — was invented in Delhi in the 1950s at a restaurant called Moti Mahal, founded by Kundan Lal Gujral. He had originally run a restaurant in Peshawar (in what is now Pakistan) before Partition in 1947 forced him to relocate to Delhi, where he reopened Moti Mahal in the Daryaganj neighborhood.
The dish was born out of practicality. Moti Mahal was famous for its tandoori chicken, and at the end of each day there would be leftover roasted chicken pieces that were drying out. To rescue them, the kitchen developed a sauce made of butter, tomatoes, cream, and spices, and tossed the chicken in it to make the meat moist and rich again. The result was so popular that it became a dish in its own right.
A couple of things worth knowing:
Moti Mahal is also widely credited with popularizing tandoori chicken itself and inventing dal makhani (the creamy black lentil dish) around the same time, using a similar butter-and-cream technique. Together these three dishes essentially defined the “North Indian restaurant” template that spread around the world.
The dish is closely related to but distinct from chicken tikka masala, which most food historians believe was invented