Dear @Parekh2111,
this is unbelievable. The Ausländerbehörde has to give you the residence permit, even if you don't have a passport for your daughter. In the meantime (while you try to get a passport for her) they can give her Duldung or better Fiktionsbescheinigung.
Try to get a written confirmation by the embassy that they won't issue a passport without residence permission. After that you can explain to the Ausländerbehörde, that this processs must go step by step: 1) get confirmation by embassy, 2) get german residence permit for you and your wife 3) apply for passport of daughter 4) provide passport to the Ausländerbehörde 5) get residence permit for your daughter.
As you have a lawyer, he can communicate with the authority, too.
I wish you good luck!
Best Regards
mbeon-Ruth
Please feel free to contact me again. My name is Ruth and I am a professional refugee advisor. In case you need a confidential consultation you can write me via the app ‘mbeon’, which provides advice for adult immigrants in Germany. Download the app at Google Play or App Store and get in touch with me or 160 other migration advisors. It's free of charge, anonymous, data secure and you can get advice in 15 different languages. Find more information here: ***.mbeon.de.