An image processing apparatus which is capable of satisfactorily developing photographed data by making up a difference in saturation level between color signals through replacement of a color signal. Saturation levels of respective color signals in photographed data are calculated, and an upper limit of a dynamic range in the photographed data is determined. Based on the upper limit, replacement ratios for the color signals, which change toward the saturation levels of the color signals, are obtained. Each of the color signals is adjusted according to the upper limit. Based on the replacement ratios, a replacement process is carried out in which a color signal of which the saturation level is low is replaced with a color signal of which the saturation level is high. The photographed data on which the replacement process has been carried out is subjected to a predetermined process to obtain developed data.