James asked me to adjudicate as an "experienced" editor(!)

He is absolutely correct in his first email - the reason is simply to distinguish its (possessive) from it's (it is). Its (possessive) follows the same rules as hers ours theirs my, i.e. it is a word in its own right which is derived from "it". I didn't know the stuff that James researched about it becoming concrete about 1800, but that makes sense, because that was when written English really came to be "agreed" (I believe). It is the case that this is something that has been singled out (e.g. by Hart's Rules).

Your example about "John's stealing Mike's umbrella" is simply incorrect in written English and should ALWAYS be edited to "John is...". People do talk quickly, but never the less the apostrophe should not be used in this way. You CAN say "He disapproved of John's stealing Mike's umbrella" , but in this case John owns the action so it is possessive not a contraction. So "its" is only necessary because "it's" exists. 

Now, whther or not we shud folough rules of writun inglish that have been set out in the passed is a difrent mater!

Hope this helps - sorry if the answer is unsatisfactory - but it is the correct answer!