Many a times, people tend to think that their body fat is getting converted to muscles if there is even loss of an inch from total body weight. However, their fat is not getting converted into muscles. This can be explained with the following rationale :

Fat tissues and muscle tissues, both are different and they are not interchangeable. When you follow proper exercise along with high-protein/balanced diet, your muscle cells increases in amount which in turn gets you into proper shape, results into an inch loss that you notice, provides strength and toning and thus reducing your fat cells. On the contrary, when you stop exercising and get back to your old poor eating habits where you do not burn any calories, your muscles start decreasing due to lack of exercise and body fats starts increasing in this process. Due to this increase in fats, you look obese as fats has no shape. And sometimes not following proper diet and not attaining good intensity of workout that body requires leads to zero results and disappointment.