The Directorate of Revenue Intelligence (DRI) has stumbled upon 17 kg of illegal gold being transported to Kashmir's areas hit by a spiral of stone-pelting incidents against security forces, and suspects that the recovery is just a tip of the iceberg that would lead to a big terror-funding channel with links to Delhi.

The apex intelligence organisation of the Indian customs has arrested two men, in an operation that points to a new modus operandi by terror groups amid reports of their funds drying up following the government's demonetisation move and a string of raids in the Valley conducted by the National Investigation Agency against separatist outfits.

The interrogation of the two men — from Delhi and Jammu — points to a channel being controlled by a renowned jeweller from Srinagar. He is also suspected to have strong links with cross-border terror groups. He is based in Srinagar's downtown area, hit by stone-pelting incidents.

DRI officers said that he lives near Jama Masjid where Deputy Superintendent of Police Ayyub Pandith was lynched in June. The agency may also seek help from paramilitary forces in raids or search operations at suspected hideouts of those involved, in Jammu and Kashmir.

A senior DRI official said that the gold worth Rs 50 lakh was seized following inputs that led to a man being intercepted last month at Delhi's Sarai Rohilla railway station. It is also suspected that gold consignments might be coming from the Middle East.

"The man, identified as Deepak Khanda, was boarding Duranto Express to Jammu. On stringent frisking, the Jammu resident was found concealing gold bars in his shoes and bags," the officer said.

All bars had their serial numbers scratched, which suggests these were illegally acquired. "Deepak's questioning led the DRI to Old Delhi's Kucha Mahajani, from where his alleged supplier Kashi Agarwal was also arrested.

Their interrogation revealed that they had been regularly transporting huge gold consignments to the Srinagar jeweller. They said they had travelled by train up to Jammu and thereafter by road up to Srinagar to avoid being detected," the officer said.