"Kinda got away from doing auditions" is a huge red flag for me.

It screams "nepotism" and "favoritism" and possibly every other "ism" you can think of. From a legal point of view, of course.

How can you justify putting X kid in the top band but not Y kid, all else being equal?

If you have enough students to have ability based classes, students should have a legitimate opportunity to demonstrate that ability. Anything else is doing a disservice to your ensembles. The kid in third band who is independently working their tail off to succeed may never get moved up because they're never challenged in class, otherwise.

If grades are an issue, then clearly state that grades and classwork are accounted for as part of the audition process.