The Chabad custom:[1] The Chabad Custom, however, is not to decorate the Sukkah.[2] We do not place the decorations neither under the Sechach or under the walls.[3] This is likewise the custom of other communities.[4] The reason for this is because Chabad philosophy preaches Penimiyus, and that one should see the beauty of the Sukkah in the Sukkah itself without any artificial decorations.[5] Alternatively, the reason is because the Sukkah is meant to be a temporary dwelling, and decorations would make it permanent.[6] [Nonetheless, even according to Chabad custom, seemingly one may put up a decorative sheet as a wall of the Sukkah, and it is not required to be blank. Likewise, pictures of Tzadikim may be placed. Also, if one’s children made decorations, one may consider hanging them for educational purposes, to encourage the child in the Mitzvah of Sukkah and make them feel happy with their projects.]
[1] See Otzer Minhagei Chabad p. 267
[2] Sefer Haminhagim p. 65; Sefer Hasichos of Rebbe Rayatz 5704 p. 12; Toras Menachem 5721 Vol. 29:41; See M”A 638:4 in name of Sefer Chassidim 263 that if one knows that children will eat the fruits, then it is better not to hang them
A letter of the Rebbe on the subject: 7 Cheshvan, 5715 [1954] Generally, a Mitzvah must be observed on its Divine authority (with Kabolos Ohl) and not on rational grounds, i.e. for any reason or explanation which we may find in it. An exception, to some extent, is the case where the significance of the Mitzvah is indicated in the Torah, and our Sages have connected its fulfillment with it. At any rate, only a qualified person can interpret it more fully. We have a rule that a Mitzvah should be performed to the best of one’s ability, and as the Rambam explains (at the end of Hilechoth Issurei HaMizbeach). This applies especially to the object of the Mitzvah itself, e.g., a Talis should be the best one can afford, an offering should be the most generous, etc. Unlike the Sechach [branches covering the top of the Succah] and walls of the Succah, decorations are not an essential part of the Succah, but an external adornment which adds to the enjoyment of the person sitting inside the Succah; they are, as the name clearly indicates, supplementary objects which decorate and beautify the external appearance of the Succah.
The attitude of Chabad Chassidim in this connection, as taught by generations of Chabad leaders and teachers, is that the Succah is to imbue us with certain essential lessons, which are explained in Chassidic literature and Talmudic literature in general. It is expected of Chabad Chassidim that they should be impressed by the essential character of the Succah without recourse to “artificial” make-up; that the frail covering of the Succah and its bare walls, not adorned by external ornaments, rugs or hangings, should more forcibly and directly impress upon the Jew the lessons it is meant to convey.
[3] Sefer Hasichos ibid
[4] See Piskeiy Teshuvos 638 footnote 25; Ercheiy Yehoshua 212
[5] See letter of Rebbe in previous footnote
[6] Toras Menachem 5721 Vol. 29:41 in response to Rav S.Z. Garelik