Darren Price, who has run the Boars Head Hotel in Bishop’s Castle for more than 10 years, had applied for planning permission to convert the pub into housing, saying it was no longer viable due to the loss in custom.
But councillors refused the application saying the loss of the historic pub would be a blow to the town’s economy.
West Mercia Police was forced to apologise to Mr Price in 2018 after “human error” saw the convictions of another man with the same name wrongly attributed to him.
Despite the police force’s admission, Mr Price told Shropshire Council’s south planning committee the business had not recovered.
He said: “The fall in trade for us has not been tourism, it has been local – to such an extent that we have 0.2 per cent of the population of the surrounding areas coming in.
“Unfortunately that is down to my personal circumstances. The reputation of the building itself has been tainted by what has happened to me.”
Mr Price told the committee that attempts to sell the pub had failed after interested buyers heard about the scandal.
Instead, he has applied to have the building converted into two houses, with the detached accommodation building known as the Curly Tail, converted into another house, and a fourth home built in the car park.
The committee rejected the application – going against the planning officer’s recommendation to approve.
A separate application for listed building consent was also refused, with councillors saying the proposal would be an over-development of the site.
Town clerk Gwilym Rippon spoke at the meeting on behalf of the town council, which opposed the application.
He said: “It would mean the loss of a community asset and the change of an historic street scene.”
He said the community wished to explore the possibility of having the building registered as an asset of community value. This was supported by Councillor Ruth Houghton, who represents Bishop’s Castle.
She said: “Losing it would be detrimental to the local tourist economy.The pub is considered a community asset though not yet registered as such.”
For more information on planning applications visit the council website.