No demand can be collected without proper service of demand notice. I presume that the demand is related to our assessment u/s 143[1] and that the A.O might have sent you the demand notice on the last address known as per return. So the A.O may not be at fault 100%.

You should take steps as under:

1. Write a letter ,politely ,to the A.O denying that there was any service of demand notice/intimation u/s 143[1] of the I T Act on you.You state that after you get the intimation, you are ready to pay the demand . Give a copy of your letter to Add.CIT Range of the A.O charge.

2. You can also write that you are filing your return with the A.O in UP on account of your transfer to UP charge.Attache a copy of your last return filed in UP office as a proof.

3. Remember, the UP office may not be able to process your return if the PAN is still with Karnataka income tax office. Therefore, you should request the A.O at Karnataka to transfer your file to his counterpart office at UP
Remember though, the power to transfer the case is with CIT and not with the ITO/ACIT . Therefore this application should be made to CIT of the Karnataka charge where you had filed the return for which demand has come.Give complete reason and also attach the copy of your return filed at UP .Since , your return has been accepted at UP, there may not be too much problem in your file transfer. Give a copy of the application for transfer to UP CIT office also.

3.As far as interest and penalty is concerned, the penalty for such amount is rarely done in I T department, interest charge is computed from the one month lapse after the date of service of demand.Therefore , service of demand becomes important.
4. As an alternative, since the amount is not very big, you should first pay the demand in protest and ask for intimation .If you find an error in intimation , file an application for rectification petition u/s 154 of the I T Act.