A developer will have to include cheaper housing in a new estate after councillors rejected its plea to remove the requirement.
Commercial Estates Group argued a Government policy called 'vacant building credit', or VBC, applied to its plans to build 320 homes on the site of Oughtibridge Mill.
The policy gives financial incentives to developers who replace an empty building with a new one. Commercial Estates Group said the council should therefore remove a condition requiring 10 per cent of the floor space of the new development to be 'affordable’.
But councillors disagreed and today rejected the firm's application.
The firm had initially agreed to the affordable housing condition when planning permission was granted in October.
Coun Peter Price said: "I do think from time to time we have been taken for a ride, and we owe it to the people of Sheffield to maximise the number of affordable developments."
Coun Chris Rosling-Josephs added: "We want affordable houses build for the young people of this city. We want good quality houses.
"When we do deals, we do it in good faith. And when developers come back and say they can't do it, there are times we get frustrated."
Coun Peter Rippon said: "If we had been aware that you weren't going to provide affordable housing, I think we would have been minded not to grant planning permission."
And Andrew Wood, of the Campaign to Protect Rural England - who had opposed the initial planning application - said: "This is a variation on a similar theme in which developers seek to wilfully undermine Sheffield Council's ability to secure affordable housing.
Speaking for the developer, Steve McBurney said the plans would regenerate a 'dirty industrial site' and would bring many benefits to the community nearby.
He added: "This is definitely not a case of a developer doing a U-turn, or shifting the goalposts, or being underhand in any way."
He said VBC could be applied to Oughtibridge Mill, and disagreed with council planning officers's views that the intention of the policy was to encourage the development of smaller sites.
The paper mill, which closed for good in 2014, is within the green belt but the site itself is brownfield.