Dheen,
According to the PAM, yes, you can upgrade directly from Solution Manager 7.0 to Solution Manager 7.1. Just check that your operating system and database version are supported for SolMan 7.1 before you start (http://service.sap.com/pam).
As Madasamy says, the upgrade guide will walk you through all the steps, and it will also list all the most important Notes to consider before you start your project. You can find the upgrade guide at http://service.sap.com/instguides -> SAP Components -> SAP Solution Manager -> Release 7.1 -> 5 Upgrade -> Upgrade Guide SAP Solution Manager 7.1 SR1. Also be sure to follow the link below that one for Update of SAP Systems Using Software Update Manager -> Update of SAP Systems Using Software Update Manager (ABAP + Java Systems) and then select for your operating system and database. You will use both of these guides in tandem.
If you don't yet have a DEV Solution Manager system, then I recommend you start by creating one as a copy of your productive Solution Manager, and then perform the upgrade in that system first, same as you would for your other landscape systems.
As for the question of upgrade vs fresh install, that's beyond the scope of this thread, and is not a simple answer that can be given without considering much more about your scenario. While much has changed about LMDB vs SMSY, etc, in SolMan 7.1, and a fresh install can seem very tempting, that will not be an option for you if you currently use other functions in SolMan such as Incident Management, etc. It also may not be an option if your SLD is integrated with Solution Manager and needs to remain available for productive usage of Portal applications like ESS/MSS.
The upgrade does work, but there will doubtless be some cleanup of the system landscape data afterwards. The System Preparation and Basic Configuration workcenter tools inside Solution Manager (after you upgrade), as well as the Managed System Configuration tool, will help you with this.
Good luck!
Best regards,
Matt