Take a look at these links, they may help:
Cold water goes in at the top of the tank.
Hot water comes out at the bottom of the tank.
In between the lines going in and out of the tank you may have a short pipe. This is your bypass. If you shut off the valves for the water going in & out of the tank, the water must travel somewhere in order for you to use the faucets - hence, the bypass. You'll likely have another valve at the top of the bypass to allow water to travel freely through that pipe, 'bypassing' the hot water tank.
The bypass allows you to drain your hot water tank if it's not in use and still have use of all the faucets.
and just for future reference, winterising:
Does this help?