Why do you want to set TERM in Emacs' shell? GNU Emacs is clever enough
to set it itself (to dumb). My previous hint with checking whether TERM
exists is valuable: only if not set source that group-wide .cshrc file!
The missing pieces from this file can be put into .emacs_csh to
initialise Emacs *shell* buffer.
          .cshrc will be executed before .emacs_csh. Where should I put the line 'if term is not set source the group-wide cshrc' ? TERM is also being set in that common cshrc file. The goal is:  it should not be set only for emacs shell.
           I found that emacs shell sets an environment variable EMACS to 't'. So only if that is set, I can set TERM env in common cshrc file. So this is working now. But this warning message is still there.

Warning: no access to tty (Bad file descriptor).
Thus no job control in this shell.
             Although almost everything is fine, there are some problems because it does'nt have a tty. For example, ftp is not working. I can't see anything on the screen although ftp commands are working, because there is no tty.
           
You should be a bit more specific in which OS this happens. And check
GNU Emacs' eshell too! This one is more kind of a terminal emulation.
*shell* is just a buffer in which a UNIX shell interpreter runs which
does not need much code from a shell rc file.
        
        This is happening only in linux OS as I mentioned in my first mail. On Solaris it is ok.
 
Our scenario is like this. We have common cshrc and aliasrc files which are source controlled. These files, which set up our environment, must be sourced by every member in a large team. Recently we upgraded emacs and since then we are having this problem. I tried eshell too. But eshell does'nt take .cshrc. Sourcing the file explicitly if causing some errors as eshell is unable to understand some shell programming constructs like 'foreach'. As cshrc is failing to load completely, our environment is not being set in eshell.
        Trying to get emacs working and allocate appropriate tty seems to be the best way for me. As I said, emacs-21.4 is able to allocate it sometimes. May be the code which does tty allocation needs a fix.

Thanks,
Sunil