Can you lose body fat without losing weight?

My uncle saw me after 1-2 years and told me I looked like I had lost 35 pounds but I actually gained 2 pounds. Now 1 year later I am trying on a dress that I wore one year ago and even though I gained 5 pounds this year - the dress is a lot looser on me this year than it was last year. This makes me think that I have increased in muscle mass and decreased in body fat percentage. I have been dieting a lot this year but every time I look at the scale - it seems that my weight is the same.
Can you lose body fat without losing weight?
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