Hi all,
Back with the report and some more doubts.

1. Editing boot.img file to refer to /CUSTOM instead of /KNOPPIX works.
2. unzip and loop mount miniroot
2.1 remove all softlinks and remake links back to /CUSTOM eg. remove the link bin ->/KNOPPIX/bin and make another one bin ->/CUSTOM/bin . Repeat the same for the links in all files in miniroot.
2.2 Unmount miniroot and gzip it. (gzip -9 miniroot)
2.3 change all instances of /KNOPPIX in all files under boot.img

3 umount boot.img

4. copy it back to master dir.
5. cd master
6. mv KNOPPIX/ CUSTOM/
7. While running create_compressed_fs .. use CUSTOM rather than KNOPPIX

*that was roughly what I did and as posted by raj1478*

now what I need to do is enable boot splash. By the way, I little correction. My work is based on knoppix as in I am using the knoppix idea but the distro is being prepared by debootstraping. Is there an option for adding a custom bootsplashed kernel. ?? or any place where such binary might be available.??

Regards