This item only appears in one level in Beyond Dark Castle, and that level is the Black Knight's Brewery, it is used to take out the Brewery Henchman to get to the exit to the East Labyrinth.
When holding this out, jump, throw rocks, or use the Shield. Instead you can Duck, Block, or swing the Shovel
The only way of dropping this weapon in Dark Castle, Beyond Dark Castle, and Color Dark Castle, is by hitting the leaving the level, or putting it back on the wall where it came from.
This is one of the few items in the game that cannot be picked up, and taken with you.
In Return to Dark Castle they added the ability to take Weapons with you. The Shovel was one of these Weapons, and now can be put away, taken with you, and used on other Enemies.
The appearance of the Shovel has stayed pretty much the same between all versions of Dark Castle.