Typically, automation would be tackled through either a REST API or the conf files.
The REST API is the safest approach because it notifies splunkd of changes (which typically circumvents restarts) and can have some degree of validation (and password hashing). Unfortunately, I don't see anything in the DBConnect docs for the REST API. I highly encourage you to open a P4 request with support (which is an Enhancement Request) so the product team is aware of your desire to do this.
The conf files approach likely requires a restart to take effect and you'll want to check the splunkd log or the startup system out to look for any validation errors. You might be able to also use btool to check for such validation errors. Passwords may get hashed at restart, just like they would for other password attributes in conf files. The configuration files are documented here: http://docs.splunk.com/Documentation/DBX/latest/DeployDBX/Configurationfilereference
1)I tried creating a connection via CLI by updating identities.conf and db_connections.conf and it didn't seem to work.
I would like know if DB Connection creation via CLI is possible or not at all..??
2) Also I believe Splunk doesnt provide automation via REST API for db connections... I didnt find them in splunk docs