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Kashmir, yes. Lahore - there simply was not enough forces available for that task at that time. You must keep this in mind that back then, the Pakistanis enjoyed a significant numerical and qualitative edge over the Indian Army in terms of armor and artillery.
Plus, what would even be the point in taking something that you know for certain you'd need to give up afterwards anyway??
Better bargaining position. They would be willing to trade Kashmir to get Lahore back. And I do think that India had the capability of keeping Lahore. For starters, Pakistan was very low on supplies and logistics. They would not be able to sustain their combat operations once the IA severed that logistic artery from Karachi to Lahore and Islamabad.