Yes, it is fully possible for TVs to change the picture using their "AI" even when streaming via an AppleTV as you do. I say "change the picture" as some would argue that they don't actually see this as a "quality improvement" or "enhancement" - which is ofcourse very subjective.
If you prefer the enhancements, ensure that they are enabled in the TVs menu. For some TVs you can selectively enable/disable these features for various inputs. Some setup specific HDMI inputs for "PC mode" where most of this is disabled by default - so ensure that's not the case for you. Note that these are changes you make the in the TV's on-screen menu.
For the final question, yes the AppleTV can definitely do upscaling. You can tweak this in the Settings menu, where you can set the output resolution you want (typically you want this to be 4k if you have a 4k TV) - and you decide whether or not the match the content's framerate, HDR/SDR setting, etc.