The narrator of ‘The Screaming Skull’ describes himself as ‘an old sailor’, and this paragraph is set aboard a ship, so ‘Top’ has this meaning:
top, n.1. 9.a. A platform near the head of each of the lower masts of a ship.
Oxford English Dictionary
(This platform provides attachment points for the shrouds supporting the topmast, and in military ships provides a vantage point for the marines to fire from. See Wikipedia for more details.)
The ship is described as ‘haunted’, so the ‘Man in the Top’ must be a man who shouldn’t be there: that is, an apparition or ghost. The capital letters make the phrase into a kind of title, indicating that we are to understand ‘Man in the Top’ as being a genre of nautical tale. The way that the narrator casually refers to the episode without further explanation suggests that it is the kind of story which we ought to recognise and be able to fill in the rest of the details for ourselves.
I am not sure that the ‘Man in the Top’ genre of story is quite as common as implied by the narrator of ‘The Screaming Skull’, but I was able to find one example:
I was just laying the halyards up off deck, when all at once the boy comes down the topmast back stay on deck, and there he stood hanging on, and his eyes staring, with his hands pointed to the top. Well, the second mate came up, and wanted to know what was the matter; but he couldn’t get him to speak for some time—at last he made out to say that there was a man in the top.
Alexander Hamilton Heysham (1831). ‘The Messenger; Or, a Yarn Upon the Lee Booms—A Sea Story’. In The Lady’s Book, volume II, p. 295.