It is possible to upgrade the IOS of a device in Cisco Packet Tracer.
1. Put the TFTP server into the workspace
2. Click on it to open its properties
3. Go to the Config tab, then click TFTP. This will show you different IOS versions which can be downloaded on a router or switch device.
You can delete the IOS that is in flash of a router. After reloading the router, it will boot to rommon mode. You can then download an IOS version from the available ones on the TFTP server.
Since Packet Tracer 6.1, IOS 15.x has been available in Packet Tracer for ISR routers as well as catalyst 2960 switch