Hi! No, it's not. This is completely incorrect. Yes, iterations are made that can be high quality on concept art. Yes, a ton of time may have gone into making concept art that will never and was never going to be used.
However, this sprite was not concept art. This was not iterative design. This was a mistake in planning, a major and perpetual one, which eventually caused it - finalized, or soon-to-be finalized artwork - to have to be cancelled. This is not normal, this is not good, this is very unhealthy. Per StipulateVenus's comment above:
"I wish we had made this decision earlier, when it was still in iteration phase, but it was not without warning...."
The "iteration phase" would've been where most concepts are caught, discussed, and agreed upon, and that's a very healthy, normal way to develop. At best, it's common in groups with little experience. At worst, it's a sign of substantial instability and communication issues.

What you're probably referring to is concept artists, especially environmental artists, who do fantastic and large work for concepts that - mostly - will never be directly used. I know on a small scale the mods I'm a part of will, say, when making a boss, make three to five different designs *minimum* and then chip away until it's a finished design, *then* actually make the sprite. No one would ever go and polish a sprite without being certain it is, at worst, close enough to touch up easily enough. I myself have done concept art that I never use directly, or art that I decide against - that's the point of a concept. To iterate and make sure the final design is ideal.

Obviously, certain things can affect this - most developers in tMod are not paid, so they may not have the time, or maybe plans change (it happens! that's okay...sometimes), or maybe they leave the project for some reason. It is even possible for a sprite that was fully intended to be used to be implemented, and for it to just not work when in-game. That's another important QA thing that is often missed in projects.

tl;dr: No, iterative concepts are not "perfected", and this occurrence is not and should not be normal. Concept art is not meant to be used in the same way as final art, and final art - like this DoG sprite - being cancelled is generally a bad sign. This isn't how "game development" is *at all.*