An image processing apparatus capable of performing development by adjusting the saturation level of each color signal, without losing gradation in a high-luminance area. Saturation levels of color signals of three colors are calculated on photographed data. Color signal values in each pixel of the photographed data are acquired as pixel information. If it is determined, based on the saturation levels and the pixel information, to perform substitution, substitution for a color signal having the second highest saturation level is performed according to a color signal having the highest saturation level, and substitution for a color signal having the lowest saturation level is performed according to the color signals having the highest and second highest saturation levels. Predetermined processing is performed on photographed data on which substitution processing has been performed to thereby generate the developed data.