Making Damascus barrels was, and still would be, a lengthy, extremely labor intensive, and hence extremely expensive, operation if done the old way, and the process probably would not be amenable to modern production methods. Strength with modern powders would, of course, also be a serious consideration as the welding seams would probably be relatively weak even if the basic material was strong steel.
Case hardening is still done in other industries because it gives a hard surface without making the steel brittle. The color, if any, is incidental. Also, various processes to chemically color steel without actually hardening it are quite common and used in reproduction guns every day.
There is no reason, other than additional expense, why any gun action cannot be case hardened, with or without color. I have seen M1911 type pistols given a color and, I admit, it is not to my taste; it just doesn't look right on a gun of that type.