'On time', implies to me a placement of the foot, as the musical beat falls, and can produce very mechanical and unmusical dancing. 'In time' suggests that we are dancing 'with' the music, and are not losing touch with the underlying pulse, but are allowing flexibility and phrasing.
A perfect example would be Slow Foxtrot. Only a novice dancer (once they had got to this dance at all) would actually place the feet with a SQQ SQQ pattern, but a more experienced dancer would 'shape' the figures so that the movement 'breathed' a little, but never strayed too far.
As a general observation, you can dance behind the beat (lady almost always will, as a natural product of the lead/follow process), but you can't dance ahead of it - that always looks awful.