It's like a little portable altar!
The Kapala is a skull-shaped chalice obtained from sacrificing corpses at an altar. It is guaranteed to appear once you earn a 16 favor points from Kali.
Functionality
Once equipped, it allows the Spelunker to absorb drops of blood by touching them - much as the Vampire does - and gain one heart for every eight drops collected. The icon at the top of the screen illustrates how much blood is needed before the Spelunker obtains more health.
An easy way to harvest blood for HP is to find any form of enemy which leaves a corpse, such as a Caveman, Hawkman or Yeti, and stone them to death with a rock.
Even after the enemy is dead, the corpse will still bleed when hit with the rock, essentially letting you build up health ad infinitum. The more corpses you can stack in one spot to throw the rock at, the richer the harvest!
Just be careful of ricocheting the rock off a wall and hitting yourself, and don't get too carried away or risk facing the Ghost.
Note that a corpse placed on an altar vanishes in an explosion of blood. If you have the Kapala, standing on an altar while you make a sacrifice enables you to collect most of the blood in one go.
Sacrificing two living Damsels is the fastest and safest way of earning 16 favor. Due to the great increase in survivability granted by the Kapala, it is usually worth missing out on a kiss or two in order to gain enough favor quickly.
It's a good policy to sacrifice any Damsel that appears on a level with an Altar if you don't yet have the Kapala, unless you're attempting to unlock the Changing Room, or have extremely low HP and there are enough substitute enemies in the vicinity to make up for it.
Trivia
The Hindu goddess Kali, among other Hindu and Buddhist deities, is often depicted holding or drinking from a blood-filled Kapala.