That formula doesn't break down. It can be proven that the right-hand side is equal to $\pi$. One reason it comes up in connection with approximation is that the arctangent terms can be approximated well by adding terms from the Taylor expansion of the arctangent function,
$$\arctan(x)=x-\frac{x^3}{3}+\frac{x^5}{5}-\frac{x^7}{7}+\frac{x^9}{9}-\cdots.$$
This is valid for $|x|\leq 1$, but the series converges more rapidly the closer $x$ is to $0$, so with the relatively small $\frac{1}{7}$ and $\frac{3}{79}$ as inputs it gives a good approximation without having to take too many terms. This can be contrasted with the formula $$\pi=4\arctan(1)=4\left(1-\frac{1}{3}+\frac{1}{5}-\frac{1}{7}+\frac{1}{9}-\cdots\right),$$ where the series converges much more slowly.
In 1950 H.C. Schepler published a 3 part "Chronology of pi" in Mathematics Magazine, available to those with access to JSTOR here, here, and here. In the second part there is the following excerpt indicating that Hutton may have suggested using the formula before Euler:

Schepler's chronology can also be found in L. Berggren, J. Borwein, and P. Borwein's Pi: A Source Book.