Preheat oven to 200°C fan-forced. Cook the gnocchi in a large pan of boiling salted water for 1 minute. Drain well.
Heat oil in a large frying pan over medium heat. Add onion. Cook, stirring, for 4 minutes or until soft. Increase heat to high, add garlic and mushrooms, cook, stirring, for 5 minutes until mushrooms soften. Add capsicum, passata, water, sugar and vinegar. Season. Bring to the boil. Reduce heat to low. Simmer, stirring occasionally, for 10 minutes until sauce thickens slightly.
Spoon sauce into 10-cup capacity ovenproof dish. Scatter gnocchi over sauce. Break the ricotta into pieces and drop over the gnocchi. Place onto a tray. Bake for 15 minutes or until gnocchi is tender. Stand for 5 minutes.
Scatter over the basil. Serve with salad.