'Was' is not possible because 'was' is never contracted to 's. The reduction in 'was' and 'were' is in the vowel - reduced to a schwa - not in the initial consonant. A 'w' is always pronounced as a 'w' : we cannot drop a 'w' in the same way as we can drop an 'h'. Of the two options you give, "It has returned" is the only possibility. If you're thinking in terms of passives, "It is returned" is another (less likely) possibility.

There's no written contraction for "It was". "It's" could be either "It is" or "It has" and both are possible in your example (It's returned). More context is needed to know which one was meant, though probably it is "It has".