A Rh(III)-catalyzed regioselective redox-neutral cascade process of carbenoid functionalization followed by dephosphonylative annulation of benzoic acids with α-diazo-β-keto phosphonate has been realized, which led to the direct synthesis of a privileged 3-substituted isocoumarin scaffold. To the best of our knowledge, this is the first report of a complete redox neutral method to synthesize isocoumarins using C–H functionalization strategy. In the catalytic cycle of this reaction, there are two possible pathways for the C–C coupling between ortho-positioned carbon atom of benzoic acid and the diazo carbon atom: (i) concerted 1,2-aryl shift and (ii) stepwise metal–carbene formation followed by migratory insertion. DFT study has predicted that the concerted pathway has lower activation energy as compared to the stepwise pathway by 1.5 kcal/mol.