But instead I got an error message saying something along the lines of "The file size is more than 500KB". Seeing this message I assumed that when you upload a JPG file of size <= 500KB, GDocs would create a new document and add the JPG file as an image in the document file. The mentioned size 500KB caused me to make such an assumption. Another option I hoped for was it would let me store JPG files of size <= 500KB. I really wanted it store the JPG files as I have been wanting this feature for quite some time now especially with all the news/rumors of Google Drive.
So I actually found an image file (a PNG file this time round) of size <= 500KB in my computer and tried uploading to GDocs. As mentioned above the attempt failed with an error message along the lines of "File type not supported".
Hence I decided to hunt my computer for a JPG file of size <= 500KB. After finding one, I tried uploading it. And voilà it worked as I had assumed (Added the JPG file as an image in a new document). Here is the screenshot of uploaded JPG file.
I haven't got the chance to test other image file formats such as BMP, GIF, etc. If any of you do, feel free to post the results in comments.