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Right now, even in 1.2.1, an user has no power to create a new category. The user is forced to choose 1. a category created by admin or 2, "no category.

I request you to add another section to "permissions" either to allow or disallow an user to create a new category.

Related problem: http://www.question2answer.org/qa/2188/categories-page-in-1-2-1
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I feel user should not be allowed to create categories.

If user is allowed to create categories whatever he/she want then then there will be no difference between tags and categories.

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Following what ProThoughts said, categories are very high profile ways to break down your content, so they are not intended to be user-created.
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