The Pit is a deep stone canyon within the MacHeath territory. This was more often than not the place where disobedient pups were sent. It is also home to Old Cags, an old MacHeath wolf with the foaming-mouth disease, who, strangely enough, never died from it. It is also the place where Toby was held hostage.
The Pit is a deep canyon, dug into the ground. It's surrounded by high rocks with small openings; Toby was able to hide in one. The ground is covered with rocks, dirt and sand. The only way in and out are some branches that may be used as a ladder.
When Toby was cubnapped, this is the place he was taken to. This is also where young rebellious pups would go.
When a pup was disobiedent, it was sent to live in the Pit for a few days. Very few pups died here, either from starvation or the disease. Surviving pups came back with their eyes very strange, being all cloudy and stone-like; so they do whatever they are told to do, and tended to die young. Like Arthur said, these pups are not "moonblinked", but suffer from something similar.