It's = it is
It's =/= the possession of it

If it owns a pencil, it is its pencil.

Don't ask me why, but this is a peculiar rule in the language.
Nothing of any peculiarity;)
"Its" is a possesive pronoun, not a noun. Maybe in a century or so, pronouns will get their "'s" divided, but then there would be an identification problem with the "'s" clitic as in "he's" (is/has).