Can you do in-place updating/upgrading of Azure VM Operating System?

Nope. As per official article:

Microsoft does not support an upgrade of the operating system of a Microsoft Azure virtual machine. Instead, you should create a new Azure virtual machine that is running the supported version of the operating system that is required and then migrate the workload.

https://support.microsoft.com/en-us/help/2721672/microsoft-server-software-support-for-microsoft-azure-virtual-machines

Instead, use the Windows Server Migration Tools to assist you in roles and features migration:

Install, use, and remove Windows Server migration tools

No, there is no such ability to upgrade an OS on the Azure VM (and not that I heard about it in future, who knows thou).