@test
This still works here on Macintosh. No idea on Windows.

I have tested this in a Windows 7 64 bit environment and it looks like there are still some issues. Following is the summary of the test results.

Scenario 1 - favicon.ico present in the template's folder: CORRECT
<link href="/joomla_34_b3/templates/protostar/favicon.ico" rel="shortcut icon" type="image/vnd.microsoft.icon" />

Scenario 2 - favicon.ico NOT present in the template's folder and favicon.ico NOT present in the site's root folder: CORRECT
No statement created for favicon.ico

Scenario 3 - favicon.ico NOT present in the template's folder and favicon.ico is present in the site's root directory: WRONG
<link href="/joomla_34_b3C:/wamp/www/joomla_34_b3/favicon.ico" rel="shortcut icon" type="image/vnd.microsoft.icon" />

For Scenario 3, the code generated is similar to the one that is generated before these changes.

Hope this helps.

Correcting my test;
Indeed, if favicon in root: no show.
But then succeeds when reloading the page. Looks like it picks it now from the root of httpdocs when Joomla is in a folder.

If I take off
//$path = JPath::clean($path, '/');
then it is OK here (Macintosh)

With the line (specified by infograf768) commented, all three scenarios wok fine.

@infograf768, @imanickam Thanks for testing. Below my Findings:
Findings:
Fuctionality: Provide a favicon in the browser. Active template overrides application.

Implementation: <link href="/j3x/j340b3/administrator/templates/isis/favicon.ico" rel="shortcut icon" type="image/vnd.microsoft.icon" />

Infra: W8.1 (32) XAMPP 1.8.1 (A: 2.4.3, M: 5.5.27, P: 5.4.7)

Environment: J336 on MySQL with Learning demo data

Result	Favicon	FE/BE	Favicon location
	V	backend	template
	V	backend	administrator
	X	backend	joomla root
	X	backend	document root
	V	frontend	template
	V	frontend	joomla root
	X	frontend	document root

Environment: J340b3 on MySQL with Learning demo data

Result	Favicon	FE/BE	Favicon location
	X	backend	template
	V	backend	administrator
	X	backend	joomla root
	X	backend	document root
	X	frontend	template
	V	frontend	joomla root
	X	frontend	document root

Environment: J340b3 on MySQL with Learning demo data
with PR manually applied

Result	Favicon	FE/BE	Favicon location	Comment
	V	backend	template
	X	backend	administrator	Filepath in url
	X	backend	joomla root	No icon link
	X	backend	document root	No icon link
	V	frontend	template
	X	frontend	joomla root	Filepath in url
	X	frontend	document root	No icon link

Environment:J340b3 on MySQL with Learning demo data
with PR manually applied, but reverted suggestion mbabker to use JPATH::clean

Result	Favicon	FE/BE	Favicon location	Comment
	V	backend	template
	V	backend	administrator
	X	backend	joomla root	No icon link
	X	backend	document root	No icon link
	V	frontend	template
	V	frontend	joomla root
	X	frontend	document root	No icon link

Based on these findings will revert the suggestion of mbabker to use JPATH::clean and request testing again.

@test
Works on UNIX/Macintosh

@test works on windows! Thanks!

Merging. Thanks.

Thank you all for testing and merging!