You can level up any item from your inventory, more likely just gear and weapons. To level up an item, you will need spare items to use as resources for upgrades, and a good amount of Happy Stars. Just choose the item you want to level up, and then choose the items you want to "sacrifice" for the upgrades. As long as you have enough Happy Stars to level up, you will get the achievement.
NOTE: If you played this before (360 version) and got this achievement, when your stats and items load up in the ONE version you'll be receiving this automatically.