happy.domain.com and domain.com/happy.html

Both these are not one and the same thing. Whereas happy.html is a page on domain.com, happy is a subdomain in happy.domain.com. But this does not matter so far as page ranking is concerned. Search engine ranks pages and not the domains or subdomains. happy.domain.com is also a page similar to domain.com/happy.html in this regard. Search engines treat web pages not web sites. Each page in a web site has a different page rank.