Answer
(Fatwa: 1133/978=L/1429)
It is undesirable to offer funeral salah in mosque according to Hanfi Fiqh but other Imams regard it as lawful. Ahnaaf give this evidence: من صلى على جنازة فی المسجد فلا شى له (ابوداؤد) One who performs funeral salah in a mosque will get nothing .i.e. he will get no reward. And it is in the book Muatta of Imam Malik:
وموضع الجنازة بالمدينة خارج من المسجد وهو الموضع الذى كان النبى صلى الله عليه وسلم على الجنازة فيه
(The place for performing funeral salah was out of a mosque. This was the place where the Prophet (صلى اللہ عليه وسلم) used to offer funeral salah.)
While it is in the book Mirqaat:
كان للجنازة موضع معروف خارج المسجد
(There was a place out of a mosque for offering funeral salah At the time of the Prophet (صلى الله عليه وسلم), this place was known to all people)
But, the Masjid Al-Haram is an exception because it is built for performing five times salah, Eidul Fitr, Eidul Azha, Juma, salah for solar eclipse, lunar eclipse, funeral, seeking rain and other matters.
وأما المسجد الحرام مستثنى كما صرح به ابن الضياء اذهو موضوع لاداء المكتوبات والجمعۃ و العيدين و صلاة الكسوف والخسوف وصلاة الجنازة والإستسقاء (شرح النقاية 1/137)
Allah (Subhana Wa Ta’ala) knows Best
Darul Ifta,
Darul Uloom Deoband