No they took it out because it became a massive TK fest - lots of the weapons have spalsh damage - shotguns, flamethrowers, grenade launcher, rocket launcher - it would just get too messay.
That said I think they need to look at Spy mechanics as it is becoming more and more difficult and frustrating to play as one.
Skill as a Spy does not enter into it when everyone just pumps a few rounds into each other to make sure they aint a spy.
Anyone not shooting all the time becomes a target - scouts just run around, putting a few close range blasts into everyone. There is absolutely nothing a spy can do to counter this, as his cloak does not last long enough.
It was ok at first, as people were still new to the game, but I think people are wising up EXTREMELY fast to Spies, and they know that with no FF on it is a simple matter of just putting a few rounds into people.
Valve need to have a think about this imo, as less and less people will play spies when they realise how insanely hard it is to score points or generally do any good