Hey!
You can't tell whether you are losing body fat, muscle, etc. from the numbers on the scale. Water weight can cause fluctuations of up to 4 pounds a day, sometimes more!
That's why weighing every day doesn't always tell you what's going on.
It does seem to be true that if you eat too low, weight loss slows or stops. Some people say that this is because the body thinks starvation is on, and so metabolism slows down for survival. In that case, eating more really can lead to pounds dropping.
The safest general rule is to go by your daily calorie burn, which is based on age, size, and activity, and then subtract 500-1000 cals for an average loss of 1-2 pounds a week over time; and, don't go below 1200 cals for an extended period.
Jay