It is very possible to add LBM and lose body fat at the same time, but in order to do so, one must pay particular attention to both diet and choice of chemistry. All too often you'll see bodybuilders bloat up like pigs in the offseason, gaining significant amounts of fat along with their new muscle.
It is somewhat problematic to make wide sweeping generalizations regarding how to do so, given that every individual is different. For example, many bodybuilders are carbohydrate sensitive, which causes them to carry significant amounts of fat and water, so their diet should necessarily be low in carbs. On the flip side of that coin, I've seen bodybuilders eat like total pigs and while gaining muscle and losing fat. However, there are some general guidelines you can follow.
Carefully choose your chemistry
One of the common mistakes I see people make is choosing highly anabolic but weakly androgenic steroids when attempting to both gain muscle and lose fat. While a cycle of anavar and winstrol may be quite effective for a steroid neophyte, once you have a few cycles under you belt and have added a significant amount of muscle beyond that which you would naturally carry, these cycles are going to result in less than stellar results. You're much better off using steroids that are both highly anabolic and highly androgenic, WHILE USING THE PROPER ANCILLARY MEDICATIONS to reduce the production of the various female hormones
Tren is your friend
I don't care whether your attempting a mondo bulk cycle or in pre-contest mode, trenbolone should ALWAYS be a part of your cycle. Why? Because trenbolone is incredibly anabolic and androgenic, yet does not aromatize at any dose. Trenbolone can have some progesterone-like side effects, but these are only an issue immediately before a show.
Accessory meds are a must!
Given that it's possible to both gain LBM and lose fat at the same time, it make perfect sense that one should always try to do so. The old approach of bulking then cutting is basically a two steps forward for every one step back technique. However, one must pay particular attention to the use of accessory drugs in order to cycle properly. There's no point in attempting to lose fat and gain LBM on a cycle if you're not aware of the effect these drugs are having on the production of female hormones. Generally speaking, the drugs that have the most profound effect on female hormone production are also those that are most effective when attempting to gain mass. However, production of estrogen, progesterone, or prolactin is counter to your goals of losing fat. That's the beauty of drugs like arimidex, bromocriptine, and nolvadex. You're certainly going to make much more significant gains in LBM when cycling test, methandrostenolone, and fina than you are if you're using anavar and deca. However, you'll also realize much more significant loss of adipose tissue on the former cycle IF YOU SUPPRESS FEMALE HORMONE PRODUCTION! Why? Several reasons, but the most important is that the first cycle is simply much more powerful than the second, and consequently your body will be in a more anabolic state. Combined with proper diet and training, putting your body in a highly anabolic state will result in a positive effect on nutrient partioning, allowing you to build muscle and lose fat at an astounding pace.