Hi Chandu,
Yes, you can make profits in the Auction market, but the chances of this are very rare.
Remember that whenever you are selling shares, there is a buyer. When you sell shares and aren't able to deliver these shares, the buyer doesn't get the shares for which he has paid money. In such a case, the Exchange calls for an Auction where someone else comes and delivers these shares to the buyer. The Exchange levies a penalty on the short delivering broker.
Let's understand this through a practical example.
On Monday, Chandu sells 1 share of Reliance Industries [Assume you are trading with Zerodha] @ Rs.1080
On T+2 (Wednesday), you are required to deliver these shares to the Exchange. Let's assume you default in delivery
On T+2, the Exchange notices that these shares have not been delivered by Zerodha and hence blocks a sum of money from Zerodha's account. This amount which the Exchange blocks is called the "Valuation Debit". The Valuation debit amount is the closing price of the Stock, one day before the Auction takes place [i.e Closing price of Reliance on Tuesday [T+1] because Auction takes place on T+2 i.e Wednesday]. Assume closing price of Reliance on T+1 is Rs.1090, the Exchange blocks Rs.1090 from Zerodha's account.
On T+2, the exchange conducts an Auction and purchases the stock from the Auction participants on behalf of the defaulting seller.
On T+3, the Exchange gives these shares to the original buyer of the shares and debits Zerodha's account with "the higher of the Valuation debit or the price at which the stock has been bought back in the Auction market". Assume in the Auction market, the price at which it gets bought at is Rs.1110, then the Exchange blocks an additional Rs.20 [Auction Purchase value of 1110-Valuation Debit of 1090]. Assuming in the Auction market, the stock was purchased at Rs.930 [Assuming Reliance fell quiet a bit], now the Exchange will continue to block 1090 from Zerodha's account and the difference between how much the Exchange has blocked (1090) and the price at which it is purchased (930) which is Rs.160 is transferred to the Investor Protection Fund.
Can you as a client profit through an Auction? Yes !
Assume that the closing price of Reliance on T+1 was 1040 [This is the Valuation Debit] and assume in the Auction market the Exchange buys back the shares at Rs.1060, Now the Exchange will eventually debit Rs.1060 from Zerodha's account and the difference of Rs.20 (Rs.1080 price at which you sold - Rs.1060 price at which it was bought back in the Auction market) is your profit.