No, It's not a video upscaler. You switch 15K and 31K on your Naomi mobo on the back / filterboard choosing the output you want. You don't need to touch the Capcom i/o for that. The Capcom i/o takes care of audio, video and controls through jamma. Maybe it's a good idea to stick the VGA cable right in the back of you Naomi mobo instead of using the capcom i/o one.
You could stick the VGA cable directly into the NAOMI, but be aware that Arcade monitors often do not support a normal VGA signal. It will display a picture, but very dark/dimmed. The Capcom I/O has an onboard video amplifier that amplifies the signal to the monitor.